Q3 2020 Earnings Call

Greetings and welcome to lots that third quarter fiscal 2020 earnings conference call.

At this time, all participants are listen only mode.

Brief question answer session will follow the formal presentation.

If anyone should a car operator assistance during the conference. Please press star zero from your telephone keypad.

Please note this conference is being recorded.

At this time I'll turn the conference over to Rachel Schacter.

Originally you may now be yet.

Thank you good morning, everyone with me on the call, It's Sean Nelson Chief Executive Officer, John Crouch, President and Chief operating Officer, and Don I don't know 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.

Hey, good statements about her future executions financial projections, and our plans and prospects.

Actual results may differ materially from those set forth in such treatment.

For a discussion of these risks and uncertainties you should review the company's filing with the FCC, which includes today's press release.

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 is non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP measures.

A reconciliation of the most directly comparable GAAP financial measures such non-GAAP financial measure husband provided a supplemental financial information in our press release now I'd like to turn the call over to Sean Nelson Chief Executive Officer of the lots that company.

Thanks, Rachel good morning, everybody and thanks for joining us today I love.

I will begin today's call by discussing our third quarter results after which I'll briefly review our high level thoughts around our outlook and provide a quick update on a recent new product introductions.

Then just crossed our president and COO I will outline the progress, we're making toward our key growth initiatives, including results around or amplified marketing programs.

Okay and shot programs.

Finally, Donna Delano Rcs I will review, our financial results and a few key items related to our outlook in more detail.

We're pleased with our third quarter results in some key learnings. We've recently gained on the marketing front that give us great confidence our ability to generate strong sales growth.

Little fourth quarter, and beyond which jacko expound upon later.

Third quarter fiscal 2020 performance includes net sales growth of 25% and total comparable sales growth of 32.5%.

This growth was driven by increases in new customers as well as increases in average order value where it'll be.

A recent new product introductions, including structural power hub and storage seats have exhibited approximately 45% attachment rates today and have lifted the blended <unk> of all sectionals purchases, new and repeat significantly.

We continue to make good progress on all strategic priorities, including supply chain optimization sourcing growth the pop up shop business and the successful launch for permanent shop in shop locations within Macy's stores intended to be a tough toward a larger program.

Our better than expected third quarter adjusted EBITDA results in spite of experiencing slight topline impact from a timing shift to some new showroom openings demonstrates our disciplined approach to the management of this business, even while achieving continued high growth.

Some of our expected third quarter topline growth was curtailed by strategic timing delays that have shifted a handful of new store openings third into the fourth quarter, we'll finish the year with 90 total showrooms, which is a 20% increase over last year.

We're now past Black Friday, and a few weeks into our critical fourth quarter, we are already experiencing greater than 42% growth versus fourth quarter last year.

Well, we continue to expect a strong Q4, we're narrowing our full year sales growth expectations to 40% to 42%.

Versus the prior 40% to 45% in order to reflect our actual Q3 sales results.

Importantly, we still expect to deliver a positive adjusted EBITDA for the full year, even after the pressure put on this business by the special trying to tariffs, which we have made rapid progress toward mitigating already as outlined in our previous report.

Now for more on Q3.

Our total comp increase up 32.5% quarter is comprised of a strong showroom comp increase of 27%.

Significant growth in our internet business of over 48%.

Adjusted EBITDA was a loss of 3.7 million for the third quarter, which was less than a loss that we had expected for this time period.

Operationally, we made good progress against our strategic priorities for third quarter, a few highlights our number one.

We continue to test and learn on the marketing front.

For two we made strategic investments in infrastructure to improve the overall customer shopping and delivery experience just in time for holiday sales, which position us for continued success as we scale.

And the three we negotiate at significant discounts with our remaining few vendor still producing in China and are already manufacturing the vast majority of sexual pieces, which by the way represent 57% of our overall sales in Vietnam and Malaysia.

Number four we opened four new showrooms and completed no new remodels during the quarter as we continue to increase our physical presence.

And number five we enjoyed strong results for pop up shop business with Cosco and successfully opened for permanent shop in shop locations inside of Macy stores in L.A., Atlanta, New York City in long Island. He's locations operating now as it has to that could lead to future expansion. We're pleased with results even as we make adjustments to hold me operations.

New sales channel in real time.

Jack will discuss our third quarter operational progress and expand on the details of these alternative sales channels in just a moment.

We're currently holding significant inventory levels. Good purchased earlier in our buildup for this holiday season before the recently established vendor discounts have been negotiated because of this the full effects of our sourcing work and strong discounts on trying to made good that are meant to offset tariff headwinds will not begin to positively impact our piano until the.

End of Q1 next year.

We plan to have relocated all of our sectional production out of China before the end of next year and manufacture the majority of older gets including covers outside of China by the end of Q4 next year as well.

Yes special parents do not a base we have a pattern moved at all.

These moves will effectively eliminate our exposure to the special tariffs and also result in lower first cost for these goods even versus their original cost levels, which you will see start to flow through up you know what the turnover associated inventory throughout next year.

As predicted weve already seen our overall gross margins declined by approximately 370 basis points year to date.

We believe that we're through the worst of our gross margin degradation and can expect to slow but steady recovery at the gross margin line beginning in Q1 of next year.

This expected recovery will be caused by previously purchased inventory cycling through or register Longwood heavily discounted trying to meet inventory along with good manufacturing of Vietnam, and Malaysia actually being sold and flowing through our PNM was the majority of our cost of goods. So.

In terms of product innovation, we are excited by the launch of the new Saxenda power hub and tracks all stores.

Since the launch of both of these new products just a few weeks ago, we have witnessed 45% of new structurals customers, including a power hub storage seat or both and their transactions.

The new customers that are purchasing these products demonstrating AOCI.

Average order value that is $1113 higher.

Those who do not these two innovation so far are driving it'll be higher by her $50 across all sectionals purchase new and repeat.

Sectionals are not just a one and done product samples already designed for life product platform that is meant to grown evolve with your life, allowing consumers to add to it and upgraded forever even in ways that couldn't imagine when you originally bought the product.

Every sectionals piece that we have ever sold over these many years already have receiver holds for the power hub embedded in it just waiting for its addition, storks actionable seats can be integrated into existing sectional set up purchase many years ago with no special considerations are alterations, we believe that over the long term this design for life reverse comp.

Ratable way of doing business.

Dalton customer satisfaction, and brandloyalty levels that will be unprecedented in the competitive landscape.

Not to mention the platforms unique implications in terms of real sustainability and reduced waste to landfill switch we're passionate about.

Numerous aspects around each of these love Soc inventions.

Of course patented patent pending and we continue to expand our.

Vast intellectual property portfolio, we continue to focus on our long term strategy and feel better than ever about our ability to aggressively gained market share in this giant and sleepy furniture category, even as we prepare to de lever stepwise innovation next year. It will greatly expand our total available.

Ladies and similarly disrupt yet another category.

In the current competitive landscape. It is important to understand how we are different from our industry the competition and any kind of comparable none of which are a very good proxy for what we're doing here.

We are true direct to consumer omni channel product company that invents things and demonstrates them to our customers in a very personal way, we do not follow a merchandising model.

Rucksack had zero low margin wholesale business, we're not an e-commerce company, a marketplace or at DTC pure play chasing down rampant growth without regard to cash burn or profitability.

Correct.

We entered the fourth quarter and look forward to delivering another strong year of gross with positive adjusted EBITDA. If you were to add back the regrettably large figure that we have paid in tariffs by this years and we would have made significant progress on our original intention to grow adjusted EBITDA meaningfully this year.

We view our rapidly expanding retail footprint as a key advantage over the various disruptive high growth companies that one might compare us to.

We are 90 physical locations ahead of most of that and about to go even faster on that front.

Our tiny showrooms demonstrate some at the very highest productivity on a four wall contribution basis.

Any retailer in any category that we're aware of and it continues to improve in real time.

Well right now we're at Middleby reinvesting much of our profits back into infrastructure to prepare for great scale. We are building toward an inflection point, where with sufficient systems staffing and supply chain efficiency in place our industry, leading gross margins can produce similarly attractive net margins someday.

This is the plan that would require many quarters to unfold, but even if it does we believe that we can continue to achieve this rapid growth.

Even while making market improvements at the adjusted EBITDA line, beginning next year, regardless of the external conditions.

So in summary, I am very pleased with our progress throughout this quarter as we look to the pivotal fourth quarter. This year, we will continue to focus on executing against our strategic initiatives and leveraging our distinct competitive advantages to realize the significant growth potential that exists for this company before I turn the color to Jack.

I went to again, thank all of our team members for the great job. They do day in day out happy holidays to all of the hashtag websites family. Their hard work is driving a rapid growth and we look forward to building on this performance as we move into the final quarter. This year, well now turn the call over to Jack our President and COO.

Well go over our key priorities for remainder of this year.

Thank you Sean and good morning, everyone. As you know marketing as a critical pillar of our growth strategy given that our brand its donuts MPC and we're investing to increased brand awareness and drive sales, we continue to test and learn with their marketing pushing the envelope <unk> innovative what campaigns channels and cadence as we mentioned on our last.

Call, we had planned to moderate or marketing spend in Q3, and we unexpected and associated sale deceleration for the quarter. Overall, we felt sales growth of 25% comps deals work was strong at 32.5% as a reminder, we're up against a difficult comparison last year with the launch of our very first labor day National.

Media campaign, just want to cheer basis, our Q3 comp growth accelerated from Q2 and what's the strongest said it's done year to date.

As we look ahead the Q4, we've incorporated marketing orange marketing beyond the traditional punch or bond.

Please with the results of the Q4 revenue growth above or 42% quarter to date as John mentioned earlier, while we continue to be strategic in terms of timing of our marketing spending concentrate to get in periods, where we maximize our wise, especially during the peak holiday periods.

Also aggressively expand our marketing efforts outside of these periods, where we see more opportunity to drive brand awareness. We will continue to look at new efficient marketing strategies to drive the business and many of the marketing initiatives. We have successfully tested so far this year will be leveraged heavily in the fourth quarter and you'll see this in Q4 as we expand our awareness.

Media outside of our historical patterns and heavy up digital during key periods in orders. Thank you conversion. This approach will have a positive impact on and on our ability to grow as we move beyond the typical furniture buying periods.

On the digital side, we're continuing to leverage our digital expertise and technology as we grow the business during the third quarter, we launched our mobile Wap for desktop in October since launch this page, which is designed to mimic the mobile app.

Sectionals build experience isn't the top 10 I visited pages on our loved Sac website. Additionally, 70% of the total mobile app downloads occurred in Q3 with a vast majority taking place after the launch of the desktop that we're also encouraged to see that sales from the my wife continue to drive at very strong average order.

Value at over $4000 importantly, we've seen very good synergy between our TV media and our digital conversion spends and we are lean into higher digital marketing levels on a very agile manner.

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Our next strategic growth priority is continuing to make investments and our infrastructure, including technology. These investments are aimed at improving overall customer shopping experience and will position us for continued success as we scale the business, commonly or head of supply chain is focused on various priorities, including one bill.

Adding scalable processes to replace the manual processes with automated applications variants, such as order management planning, a replenishment distribution and logistics management.

To improving system integration between supply chain enter carriers are threepl distribution centers, three reducing the cost per mile with why an additional two more distribution centers and the school 21 with one on the East coast any other on the West coast in for continuing to transition China sourced product to Vietnam.

And Malaysia recovers in liners, which John discussed earlier.

Well continue to keep you updated on the progress of each of these four priorities.

Yeah, expanding improving our children presence, we opened four new showrooms in the quarter ending the quarter with a total of 84 showrooms, what's that mean relocations now in the current rebranded side.

We remain on track opened 17, new show rooms, netting that team for the year in fiscal 2027 of those openings planned in Q4 alone as John mentioned earlier, we did see some timing delays that showroom openings acute rate, but we look forward to completing her openings for the year in the coming weeks and benefiting from our expanded private.

But the sales and brand awareness perspective, as a reminder of the economics of earnings showrooms are very favorable with Preopening investments of approximately 350000 per location, which includes floor model inventory capex and all preopening expenses and the average payback of a showroom investments made another two years.

As we looked at next year Schirmer openings will continue to accelerate our shop in shop partners will expand.

Support this growth we're excited to announce the appointment of clarity grown as VP of real estate clarity will lead the real estate strategy evolution the selection process.

We continue to grow or showroom pop up shop in shop footprint and expand loves that Brad Clarice previous experience in various retail real estate roles such as foresight retail advisors, we Mercury Brent that's got to just to name a few makes him a great addition to our team and we're looking forward, but seeing the benefit.

From his expertise the creation of this new position demonstrates our focus and commitment to making the necessary infrastructure and Alan investments to support the significant growth that lies ahead for loves that.

Turning to our pop up shops, and the third quarter fiscal 2020, we operate in 192 pop up shops with cost go up.

Up from 155, and a third quarter last year, which drove a significant increase in our other channel sales to 8.2 million from 5.9 million pop up shop productivity increased 7.5% in the quarter.

There's been a contributor to our growth in the past 24 months.

In October we also ran an 18 day event on Pasquale Dot com body loves stack with nationwide coverage that was very successful scheduled an additional online event that will take place before year end. We continue to value are strong and progressing relationship with Costco as our pop up shops and online roadshow events allow us to capitalize on.

The customer acquisition opportunities.

Hi, traffic locations, including both at brick and mortar locations and their website, which provide us the opportunity to showcase the limited offering of our products customers, who may not know our brand and our unique product attributes.

As we continue to leverage this model and establish additional reach people loves that Brad we launched or Macy's shop in shop pilot and four locations. During the quarter. These were shop in shops are permanent asset light locations and key Macy's stores carrying the same digital technology of our showrooms and our staff I love sack employees under.

The direct supervision other sales operations.

While still early we're very pleased with the initial results in positive customer spot as new customers enjoy the lives actual demo that as experience has taught us leaves us increased adoption of this actual platform preliminary data shows that at the Macy's locations. We are acquiring significant number of new customers.

The plan remains the castings for initial locations for at least the full year prior to expansion and we'll continue to update you on the test details performance and potential expansion plans.

Is that information becomes available. In addition, we'll continue to explore shop in shop format with other retailers given the positive results, we've seen thus far and our expectations for margin rate and contribution to be similar to our freestanding showrooms as we go forward, but with less than a third of our Capex investment.

So in summary, we're very pleased with all the operational progress. We've made in Q3 as we look to the final quarter of the year by far most important from a sales volume and profit generation perspective, we have a strong start and we feel great about our positioning and marketing plan heading into the peak volume weeks, we'll remain focused on this.

When execution of our growth strategies to help drive market share gains and realize the significant opportunity we see in our Brad and with that for a more detailed review of our third quarter results as well, obviously items related to outlook I'll now turn the call over to bottom Alamo, Our chief Financial Officer.

Thank you Jack Good morning, everyone. I will begin my remarks with a review of our third quarter results and then provide some commentary around outdoor fiscal 2020.

Net sales increased 25% to 52.1 million for 41.7 million in the prior year quarter. This sales growth was driven by strong showroom Internet pop up shop performance as well as new shop in shop test locations.

We saw growth in transactions as well as to get resulting from successful digital marketing strategies, which truly new customers to the brand well also driving repeat purchase behavior.

An increasing the number of showrooms also helped to fuel our Q3 sales performance.

Total comparable sales, which include show on the Internet sales increased 32.5%.

Comparable showroom sales increased 27.1% and represents our twelveth consecutive quarter, a positive comp sure on sales increases.

We opened forney showrooms, which is 9% year over year growth and ended the quarter with 84 showrooms as Jack mentioned, we are on plan to open 17 showrooms for the year with seven Shalom openings falling in the fourth quarter.

Looking at our results by child for the third quarter showroom sales increased 15.8% to 32.5 million.

Our net sales increased 47.7% to 11.4 million and our other channel sales, which includes our pop up shops in cosco location and shop in shops in for me, it's tough locations increased $2.3 million to 8.2 million for the quarter.

My product category, our sectional sales increased 26.3%.

Sock sales increased 17.9% and our other category sales, which includes decorative pillows blankets and other accessories increased 25.7%.

Gross profit dollars increased 14.7% 26.3 million in the third quarter.

As expected gross margin percentage decreased by 450 basis points to just be 0.4% from 54.9% reported in the same period last year.

This year over year decline was primarily driven by the 25% tariff impact partially offset by reduced cost of our socks and all in Soc product.

Narrowly related to cost savings from a change in the sourcing a luxoft and down landfill.

And an ongoing shift the manufacturing to Vietnam and other countries outside of China.

As a reminder, it it's the timing of our tariff mitigation efforts that is causing this temporary gross margin pressure.

Sean said, we fully expect it completely mitigate the impact of tariff through the work we're doing on the sourcing front as well as collaboration with our vendors by the end of fiscal 2021.

For the third quarter total S. DNA, excluding advertising and marketing expense increased 26.7% to 25.5 million from 19.3 million in the third quarter last year.

Excluding approximately 174000 of other nonrecurring expenses related to financing fees associated with our primary and secondary offering and board and executive recruitment fees total X gene a increased to $24.3 million.

The increase in S. DNA was driven largely by increases in infrastructure improvements insurance costs, an increase employment costs, partially offset by decreases in various selling related expenses.

Our investments in advertising and marketing, which benefit extended periods increased $2.1 million, 40.5% over the third quarter of prior year.

As a percent of sales advertising and marketing expenses increased approximately 150 basis points.

13.9% this quarter largely due to an introduction of additional media involving veterans day.

Depreciation and amortization increased $300000 from the prior year period to 1.4 million principally related to capital investments for new when remodeled show.

In the third quarter fiscal 2020, the operating loss was $6.9 million compared to an operating loss of 2.7 million in the third quarter last year.

In the third quarter fiscal 2020, adjusted operating loss was 6.8 million, excluding approximately 76000 of nonrecurring expenses related financing fees associated with our primary and secondary offering.

In the third quarter fiscal 2018, adjusted operating loss was $2.2 million, excluding approximately $440000 of nonrecurring expenses related to financing initiatives, our secondary and primary IPO related fees.

Our net interest income for the third quarter was 134000, which reflects the impact of our IPO and other primary share finance.

Tax expense in the third quarter fiscal 2020, and 2019 was not material. It was related to minimum state income tax liability.

Before we turn our attention to net income net income per share an EBITDA I would like to point out that my discussion of these metrics will focus on net income and net income per share adjusted for the IPO and other financing costs as well as adjusted EBITDA. Please refer to the terminology and reconciliation between each of our.

The metrics and their most directly comparable GAAP measurements.

Earnings release issued earlier today.

Adjusted net loss was 6.7 million, what 46 cents per share in the third quarter fiscal 2020 compared to an adjusted net loss of 2 million or 15 cents per share in the third quarter fiscal 2019.

Adjusted EBITDA was a loss of $3.7 million as compared to a loss of 400000 in the third quarter of last year.

Turning to our balance sheet, we ended the quarter with $27.9 million in cash and cash equivalent.

Ending inventory increased 104% year over year, driven by higher sales.

Increase in capitalized freight cost relating to terra as well as an increased investment in the weeks the supply as inventory on hand to support sales growth across all channels to be agile enough to support the success of our advertising and marketing investment.

As well as an increase in capitalized freight and warehousing costs relative to the build in inventory and tariffs charges.

Now I would like to discuss a few items as it relates to our fiscal 2020 outlook.

From a showroom perspective for the full fiscal year 2020, we are on track to opened 17 showrooms. This year, what seven showroom openings planned for Q4, and we continue to expect to remodel eat showrooms.

As a reminder, we are now referring to our Cosco road shows that pop up shops, and our Macy's pilot a shop in shops, even the nature of the shop set up.

For fiscal 2020, we will operate a total of four Cosco inline road shows three of which happened in the third quarter. In addition to our in store pop up shops with Cosco as well as for test shop in shop locations with Macy's, which was launched in the third quarter.

We expect to deliver strong levels of sales growth between 40, and 42% in fiscal 2020, which implies Q4 revenue growth at or above the high end of this annual rate.

As John discussed, we have seen greater than 40 person, 2% revenue growth in the fourth quarter to date.

Combined with our seven showroom openings in Q4, or 21% showroom growth expected cadence and impact of our marketing investments and our expectations for our pop up shop initiatives, we are well positioned for the fourth quarter.

Given the significant tariffs mitigation process. We've made we continue to expect to generate positive adjusted EBITDA that's difficult 2020.

We expect full year gross margins for fiscal 2020 to be approximately 370 basis points lower than fiscal 2018, principally related to the fall.

The first being expected tire pressure, which is being partially offset this year by mitigation actions NSG in a initiative.

Investments into our distribution infrastructure to support future growth.

A slight headwind due to the continued shifting product mix toward sectionals as well as a slight impact from higher pop up shop child.

Oh.

These decreases were partially offset by product margin gains related to changes in discounting and promotional strategies reduce product costs related to vendor sourcing strategy negotiated discounts with vendors in China to mitigate tariff crushers as well as an accelerated shift of sourcing outside of China.

In terms of dusting <unk>, excluding advertising and marketing expense as previously mentioned, we continue to expect the most significant DNA leverage to be generated in the fourth quarter, given the seasonality of our business.

As a reminder, embedded in our SGN <unk> outlook is all of the investments we are making the business across people process and infrastructure and our Q4 net sales volumes enable us to produce the greatest amount of leverage on these investments over the prior year.

Finally, as it relates to capital expenditures, we now expect to occur approximately 10.5 million of Capex in fiscal 2020 versus our prior guidance of approximately 11.5 million due to a timing shift of investments of self manufacturing capex to fiscal 2021.

The vast majority of our Capex. This year is being spent on the opening of 17 showrooms remodel of approximately eight legacy stores. The opening of for Macy's shop in shop pilot locations and approximately $300000 being dusted into the Soc manufacturing facility. This year.

The remaining spend is being allocated to technology, and our showrooms inventory management and logistics systems ecommerce platform enhancements and for headquarters data and supports it.

Oh, all other details related to our results. Please refer to our earnings press release with that we would now like to turn the call back to the operator, who can open it up for questions operator.

Thank you at this time will be conducting a question answer session.

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Thank you My first question. This from the line of Brian Nagel with Oppenheimer. Please proceed with your question.

Hi, good morning.

Thank you want to take my question.

So the first question I want to ask this with regard to.

Sales growth and I know, there's a lot of moving pieces here.

In the fiscal third quarter is you discussed with the 25% sales growth. So that was down from something to mid forties in the second quarter and then so far in the fourth quarter <unk>, It's Paul your Salesforce improved to 40% so.

Could you help me understand better just the they rank order crackers that sort of say created that.

David If you will in sales growth in the third quarter, recognizing that the comparison got more difficult.

Yeah. This is Jack I'll handle that I think one of the key insights to look at that is if you look at.

One thing we haven't seen in a couple of quarters based on cadence is the fact that our overall comps for example, and show rooms were greater than are showing growth. So basically we had a pullback weber on non comp.

Perspective of the business versus a year ago and that really is tied to those showrooms that shifted back approximately we had seven showrooms and shifted between the third and fourth quarter.

In one shape or another.

Okay.

So we use these are weighted Jack.

Pretty hard to spread if you could you look at your back and say if you didn't how bad that shift in Oh in openings from Q3 to four what.

Q3 sales growth would have looked like.

I mean does not enough you want to take a stab at that what we think the impact was the onetime impact.

I can but let me also note that we were originally predicting to be our growth in the third quarter to be I'm, a little less than it was in the second quarter due to the things as Jack mentioned and also the growth of the pop up shop.

Business year over year, if you go back to what we had said in the second quarter call on the second quarter call. We again, we had predicted to take a dip in the third quarter relative to that as well you know we're anniversarying the media on the growth in our.

Our shop in shops are pop up shops year over year, because we had significant growth last fiscal or a little lower in the third quarter of this year. The downloads were probably looking out that shift in sales for the new showrooms, Okay sure showrooms opening probably too.

The approximately $2 million, which.

Because we weren't able to open originally as planned in the third quarter, it's probably about a 2 million dollar impact on the topline.

No.

But its important grind that to say if you look at again back to the T or you know I'd like to look at two year stacks.

Q3, Oh, the two year stack was the highest it's been your today that 83% Pops and we expect Q4 to be the highest a year. So.

Going over a tougher comparables the two year stacks are continuing to be very strong.

Got it that's helpful. And then another question with regard to sales I'm sure you talked about the nice performance. So far here in fiscal Q4. So it's a calendar goes were I.

I guess about halfway through.

Half way through the quarter, but just can you remind us where you know given that the lumpiness in the holidays in the fourth quarter, how much of the how much a coupon business has probably been transacted.

So far.

Wow.

A week to week abate that changes pretty quickly Don I'm not sure. If you can you have that it's probably.

I'd say, we still have a good at least 50%. According to go is that correct Donna.

Let me give me a second I'm just going to check that yeah. I mean, there's I think and one thing just to build on that what she's looking at the numbers is coming out I think it's really important to note that while we intentionally pulled back on the labor day marketing or media really.

Because we saw an opportunity that to really be a little bit more distinct between our or awareness media in or conversion that we've we think we're in a really nice place, especially with the Wackiness around you know the Q4 ships to just be on media full time and then just.

Aggressively go with conversion digital media the sort of the classic.

Furniture buying period, so it gives us a real opportunity to expand our awareness.

Basically an always on basis.

Dan just to go from Yeah, we're right at around 50% at this point.

Q4.

Before its volume.

Yes, that's one borgata they'll be able to somebody else but.

With regard to that and congratulations on so quickly shifted the supply chain. So like would you say as far as the tilted Patrick.

We probably just saw a bottom that it would be up have you said it better the impact on gross margin. We just saw a bottom is it still be assumption that as the supply chain initiatives take hold that loves sack will essentially we get back everything from Boston gross margin is result of terrorists over the next several quarters or so.

Ill.

Oh, Okay I'll cover that and then I'll ended I think the daughter and Sean as it is a large basis, we certainly but we are at the lowest level I'd say of margin and we'll continue to leverage in our margin, but it's also important to note that everything we gain from margin improvements won't go back up to building pure.

Profitability in the short run because we have about 18 months, where we've laid out a lot of infrastructure commitments building show rooms, a building about her WMS et cetera. So while we will gain significantly at the margin level will leverage significantly in the next 18 months, we're not going to aim to push 100% of that into.

EBITDA because a word really just trying to build the base for the company being a billion dollar company in the next couple of years.

Yeah.

Yeah, and Nike Oh go ahead sorry.

Okay on so yeah, two jacks point that that's definitely something to keep into consideration and as far as Harris I just as a reminder, we do maintain 12 to 14 weeks the supply of inventory on so as we're shifting out.

China into Vietnam, we still do have inventory that's been impacted by the tariffs that will be selling through so well continue to see some intact at lesser and lesser and lesser impact as we sell through that inventory and there still will be up here part of our inventory specific.

Really related to fabrics that we're working to move out of China, but there is still a although the smaller part of our inventory we will sell still have a piece I'm throughout this year that has US has eight harris intact. So we will still starts it we will still see sometime.

The impact its although significantly less than last year.

But there will be initiatives next year related to supply chain and distribution that will impact the gross margin line. So we're we're not expected to recoup 100% that tariff impact, but we do we absolutely do you expect to see our gross margin line start to excess.

Right.

Next year, and then the years going out.

Yeah, just one my comment on that I think to the weren't you know short answer to your question. Brian is yes, we will see gross margins recover fully as we view it but not.

Overnight and not even in the next four quarters fully and it's not that terror issue alone. It's our investments in to supply chains that are happening and need to happen to really get this business a scalable as we'd like it could be because we foresee high growth.

For a very long time.

And so we are investing heavily in a it'll just be a long protracted recovery you know over you know I won't give your number of quarters, but more than four quarters, but we will absolutely. We believe we have a direct path to absolutely get it back.

To where we'd like it to be.

Gross margin I appreciate it looks well appreciate all the color that's looking about from New York. Thank you.

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Our next question that's from the line of Thomas Forte with D.A. Davidson. Please proceed with your question.

Great. Thanks, two questions. So first I wanted to talk about your ability to opportunistically get higher quality real estate locations for your new showrooms in today's retail environment, but anecdotally in Fairfield County, I've seen some new excellent locations both Greenwich in Westport, and then second I'd like to give you the opportune.

To me given that I get a lot of questions on this to talk about Macy's. So Macy's as a retailer seems to have a number of challenges, but can you remind us why you think Macy's is a great partner fear shop in shop efforts. Thanks.

Okay. So all lines, but I'll just answer that in order. So I think Tom from my perspective, or real estate, you're absolutely right on and I think one of the thing that having a very balanced business approach in terms of being omni channel being digital haven't showrooms allows us and having a fair amount of marketing behind us given.

Yes, new choices. So you certainly have seen off mall locations as well as lifestyle center locations pop up a will continue to be be significantly more diverse in the future as we as we look at a bar opportunities and we look at <unk>, the investment and media relative to the investment and ER and various levels of.

Real estate as as really shifts between customer acquisition approaches. So net net I think you'll see us more and off mall in the long run as we've seen the ability to open a street locations very quickly based on our media and that gives us a lot of power in terms of negotiation. So I think we'll see a considerable diversity in the future.

Sure as wells and ability to leverage our real estate costs.

The second one the second question was about Macy's Yeah. So I think the one thing to think about maybe they certainly have a lot of problem is that sort of like the you know the the end of the retail world in the retail Apocalypse, Macy's certainly has their own challenges, but they're pretty large companies still and they have a very large percentage of the overall furniture.

Market in the U.S. in fact, there one of the largest.

Furniture retailers and they have a significant shared a sort of a customer base. That's your some of the values of ours, especially in some of their more premium location. So I think we have a huge opportunity to learn where the biggest opportunities are how their real estate works with ours and how to leverage each other in order to create a.

Okay backs.

When when high brand awareness model a lot of opportunity that is the test and as soon as we have more insights. We'll keep you posted but there's a lot of people shopping and make the band the company is going to be around for a while that we're going to try to see if we can leverage off each other.

Thank you Jeff.

Our next questions from the line of Maria Ritz with Canaccord Genuity. Please proceed with your question.

Hi, good morning, and thanks for taking my question I could you share maybe any additional color around a your commentary of greater than 42% revenue growth. So far this quarter given that your guidance implies a 42% to 47% growth in Q4 and a than I have a follow up.

Donnie you want to you want to start that are.

Yeah can you just repeat that one more time I'm sorry.

Oh, Yeah, I was just asking a whether you could maybe share some additional color around your commentary of greater than 42% revenue growth. So find the corner because I think your guidance implies a 40% to 47% growth range in in Q4.

Well, we didn't give Q4 guidance our guidance is saying, 40% to 42% for the year.

Does that make it clear so it.

And Sean mentioned did you mention 42% quarter could day, which so yeah, I mean, I really I think what we were trying to say, we don't want to give guidance for the rest of.

A year, which I mean, it's getting pretty close to given you're right as we speak but the bottom line is I think the point is coming out of the labor day period, and looking at our new marketing strategies that are not as based or focus as much on these big furniture events are these big sale events, such as labor day, or Black Friday has real.

<unk> allowed us to create a.

New baseline outside of those periods, which which is giving us a 42%.

Rose quarter to date and makes us feel confident about the business strategy going forward.

Right and the only other thing we did say as far as for the fourth quarter that we didn't feel that the court fourth quarter would come in I.

Or above the high end of the range of the 42%.

Yeah, So and we have led to the fourth quarter stack Pops will be the hives that year.

Got it and then maybe on your advertising outside is your brand awareness increases and I, you've seen any changes in the type of buyers fewer trucks into the platform either from a sort of <unk> demographic standpoint, or the stickiness with the platform and also how you're thinking about that have shrunk the brand awareness driving higher.

Between all the time.

Oh good questions. So in terms of we are seeing and what are what I'll do a say we are seeing some things, but some things change and I'll probably for most of that answer to you are.

Our Q4 results as we talk about sort of the overall view of the year for customer acquisition and the look of the customer, but we're seeing we're certainly seeing a broadening.

Summer appeal across larger sets of age groups. So we do see along with the young millennials, we're seeing what we call the silver boxes coming in a in buying at significantly higher levels as well. So we're seeing a really an expansion.

Generationally or in the interest and I think that's clearly directed based on the the TV awareness campaigns that that we use them last year. So.

And then follow up what was your next question.

I <unk>, but that wasn't bad ones that that'll help them up [laughter]. So you answered thanks, so much.

Oh EMEA Tobey I think you, yes, we're continuing that's a good point because I didn't want to we're continuing to see increased a ob and were very I think were very positive on that and it's it's not through promotion I think it's really critical to say, we're gonna see growth through repeat purchases.

Through our new products. So we're already seeing a really nice attachment rate up from a driven by both new customers and also our embedded customer group in terms of historic seat in the power hub and they will continue to grow in terms of Ah impact on the business and <unk> and the out years, we're very excited about what we're seeing in terms of the platform.

Songs discussion of the platform historically, that's not a product it's a platform in the benefits of it we're clearly seeing that and.

In the in the third quarter, and we expect to see going forward in terms of very high attachment rates and seeing immediate impacts on a or b with those customers trading off.

Yeah, and I'll I'll add Maria because you had you had mentioned the IDE the notion of future business being driven.

Bye.

Word of mouth and by.

You know they.

The contracts that we shouldn't forget is that Lovestruck has left in 2% brand awareness.

Externals are very unique invention that masquerades as a couch, but it's quite unique in the landscape there's nothing like it.

Sectionals catch on some day [laughter], you know behind our forcing it through the funnel with advertising as they become popular.

Right business has a tremendous opportunity to enjoy a tailwind. It just comes from brand awareness that we don't have yet and we often overlooked mentioning that because you know, it's it's impossible to plan, but it's undeniable that the competitors, who we sell couches against many of them have cigna.

African brand awareness that drives those business with very little advertising.

And we will achieve that as the further we expand this grant and that's just done it's impossible to.

Planned out, but that's something we very much expect.

And I think the build on that I think it's funny.

We are after a lot of watching about increasing levels of marketing et cetera, how does that work in the long run like the one thing to to for everybody to keep in mind is.

Because when we have strong showroom business as well as a DTC business outside of showrooms, we're really in a fortunate position so to put in perspective. This year alone even with the significant increases in TV advertising our number one source of new customer acquisition showrooms. So that tells is two things we have a long runway to acquire customers.

This was showroom broke number two every time, we opened a showroom, we got a 2% increase in our ROI on marketing so.

There's a real virtuous circle, there that will continue to help us drive efficiency and marketing that probably isn't it's obvious.

Externally right now, but we'll see huge advantages in the next 24 months.

Great. Thank you so much.

Our next question, it's from the line of Dave King with Roth Capital. Please proceed with your question.

Thanks, Good morning, everyone.

Hey, Dave first on the Hey on the on the 40% plus growth.

Implied for Q4.

How much of that its transaction versus.

ASV growth and then how much you planning to grow marketing to get that that revenue.

Yeah I can tell you. So a couple of thing if you look at our.

I'll give you our year over year Mark.

<unk> from the last three years, so year over year, ending last year, our marketing grew from $9 million 18 million. So that was up 600% year over year. This year, we're going from 18 to 30 million. So it's approximately 60% growth year over year. So we have growth that's higher than our <unk> marketing spend.

Right now it's at a higher rate than our total topline growth. However.

As you well you can see for those numbers the rate of increase is decreasing than we expected feedback you continued to decrease so we do see an endpoint, where we get the efficiencies will so we will see an increased approximately I'd say, it's going to be about 50% to 60% in marketing increase in the quarter over last year, and we'll see very strong growth.

And then on the.

Transaction versus Navy do you have what yeah. So I can't I want I don't want to give you. The detailed numbers in terms of Gulf War, because now we're splitting the quarter I can tell you for.

Year to date.

We are roughly at.

We'll be about in the mid teens and transactions, increasing and approximately 20% in there.

No because that helps and then.

As a follow up on the on the marketing on the marketing front how are the ROI.

And you know the efficiencies on on the marketing. These days are the TV ads they'll perform into your liking. The you know what's working is there anything that isn't working just some color. There I think would be helpful. Thank you.

Yeah, I think right now ROI, but then a relatively stable we're not seeing a decrease or necessarily an increase I think there's sort of there's two sets of Ah.

You know, there's there's headwinds in pricing and competition in terms of cost.

And there's tailwinds in terms of building out our our show room. So we expect is we go forward for the next 12 months to be looking at pretty stable ROI.

Based on a different combinations.

And we expect so Dave and also I would say were roughly this year were roughly spending after 12% of marketing 12% of net sales that will possibly go up just a little bit, but we'll talk about that in the future, but we don't see any dramatic changes in terms of.

Rates of marketing will not increase faster than the rate of sales in terms of the future as we go forward.

Okay, and then on the ROI are those don't being stable are those still consistent with sort of the numbers you laid out I think when you run the timing of the IPO in terms of yeah were very very yeah, yes, we're very pleased and put it into more detail I think to subtlety. There that I think if you looked at.

The market right now just about everybody is advertising around those big plunger periods right. So there and they're mostly digitally advertising or the classic larger companies are promoting you know a thousand dollars off et cetera.

Our.

Getting our awareness or branded advertising has no promotional mentioned that and it's not promotional advertising at all so what we're really talking about as a distinction between creating brand awareness, which we believe is absolutely critical in the long run.

Creating a more efficient way to create brand awareness and separating that activity from the conversion activity that is really around those key furniture bond periods and driven by digital we will certainly continue to heavily invest our digital around those periods, but we're finding is that by creating brand awareness, where there's less promotional noise.

We can get some pretty high ROI is your route and then in fact.

It makes us feel really good about next year, because instead of focusing all of our media at our and our analysis on 14 to 18 weeks. We're looking at 52 weeks and looking at really being subtle about how we manage our our brand building aspect of our business relative to our conversion or promotional asked but business and so that's why it's it's hard to understand what.

We're saying in our excitement is I think as we roll out for next year and we've talked about our annual plans that will be a lot clear, but we're seeing a and always on opportunity in brand awareness, which allows us to really manage costs and manage around the competition away they can't because they're so pro promotional independent.

Okay. That's very helpful. Thanks for taking the questions and good luck. That's there. Thank you.

Thank you next question to Atlanta, Dallas for women with Craig Hallum, especially with your question.

Great. Thanks, very much for taking my question I wanted to ask about the the attach rate on the power hub in the storage seat that you're seeing a those we're certainly very impressive numbers can you give us a sense of you know when that really started to pick up and have you been marketing pretty aggressively to former customers to get them to come.

Back in and get the power hub I'm. Just curious you know how long we should be expect to see that that lift in average order value.

Well I. Good question I would expect we have not really been spending I would say, we haven't been doing an over [noise].

Over aggressive marketing program with those items, we certainly market to our installed customer base, obviously via direct mail and catalogs et cetera, so they'll be aware of it but we don't see any reason for that attachment rate at this point to go down now it's very early but based on what we're seeing we expect it to build that into the business small.

Sales for the next year.

Okay. That's it that's really helpful. Thanks, and then if I could just ask a a question on the mechanics that the Q3 numbers here I'm comparable showroom sales were up very nicely close to 30%, which was more than the increase in in show room revenue can you give us a just a you know kind of the summary on how.

Comp store sales have been higher than then show room revenue for this quarter is this just that the timing of when stores have entered the comp base or something like that exactly it's all comp base. It was absolutely 100% driven by signing up the comp base. If you were to and obviously, we have as we look at our new showroom opening run rate.

There is strong as they've ever been so we're extremely excited about especially our new some of our off mall openings, having extremely high run rates up so it's primarily a shift.

Okay. Thank you very much.

Thank you.

We have reached the end of the question answer session Oh, now turn the call over to management for closing remarks.

Sean you want to take this month.

Yes, thanks, so much for joining us today and we appreciate all.

All of the great questions. Once again, thanks to all the looks at family for your hard work and we're very.

Excited about fourth quarter and moving into next year and continued growth.

Thank you.

Thank you.

Conclude today's conference you may disconnect. Your lines. This time, thank you for your participation.