Q3 2020 Lovesac Co Earnings Call

Greetings and welcome to the loves <unk> third quarter 2021 earnings call. At this time all participants are in a listen only mode of question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this kind of.

Hi, This is being recorded I'd now like to turn the conference over to your host Ms., Rachel Schacter of I see on thank you you may begin.

Thank you good morning, everyone with me on the call is Shawn Nelson Chief Executive Officer, Jack <unk>, President and Chief operating officer dotted on low 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 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.

Your review of the company's filings with the FCC, which includes today Trust really you should not rely on our forward looking statements of projections of future of at all.

All forward looking statements that we make on this call are based on assumptions and beliefs as of today, we undertake no obligation to update on 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.

Reconciliation of the most directly comparable GAAP financial measure of such non-GAAP financial measure has been provided a supplemental financial information in our press release.

Now I would like to turn the call over to Shawn Nelson Chief Executive Officer of the loves that company.

Good morning, everyone and thank you for joining us today I will begin my remarks by discussing the overall highlights of our third quarter performance on Jack will discuss the operational highlights of the quarter end progress being made on our key initiatives against what continues to be at dynamic backdrop.

Donna will then review our financial results on a few other items related to our outlook.

During the quarter, we continued to successfully navigate amidst the challenging backdrop as demonstrated by our financial performance as well as our progress on the operational front strong topline growth of 43.5 per cent exceeded our expectations and is a testament to the exceptional job. Our team has done to meet customer demand amid a pandemic impacted ampyra net.

I continue to be very proud and grateful for their efforts.

We saw extremely high levels of profit flow through on this sales increase given our swift moves to cut cost and overhead and tightly manage inventory during the pandemic of course of sales have returned so also will cost of debt.

On a will discuss in more detail.

Now, let me speak to some highlights on our operations. We are pleased with our children performance. Despite the pandemic environment as we operated shards any variety of formats, including walking appointment on me and virtual the.

The strength of our share in performance was reflected in Q3 at 25.5 per cent comparable showroom sales increase.

All seven of our shop in shops, with Macy's and best buy were opened during the quarter, which Jack will discuss in more detail.

The Big news release prior to quarter end is that we launched a robust product offering on best buy Dot com just in time for the holiday. We're very excited about this expanded partnership which will allow us to reach a broader audience and accelerate adoption of this actual platform.

We continue to be excited by the alignment of the best by customer demographic with our own especially in terms of their intent to buy within the home category when shopping at best buy often during a relocation or remodel.

As you're aware there are widely recognized headwinds we are now beginning of supply chain landscape, including a general shortage of ocean containers and equipment, but overall, we have been able to maintain excellent inventory positions and are currently delivering the majority of orders to consumers within a week to 10 days as expected.

Moving to our financial highlights we continued to see very strong demand for our products in Q3, resulting in 74.7 million in sales or 43.5% sales increase including 125% ecommerce growth. In addition, we had at revenue contribution from to Cosco temporary on my pop ups, which lasted up.

Four weeks each ending in September and October there were not reflected in the expectations. We shared with you on our Q2 call.

We had a strong start of the quarter with positive momentum from our Labor day campaign, which performed very well with media ROI above our expectations from a profitability perspective on results came in well ahead of our expectations due to higher margin product mix and more effective price promotions combined with.

Some timing shifts on expense deferrals at dawn of will discuss in just a moment as a result, adjusted EBITDA was $6 million for the quarter.

And we ended the quarter with a cash balance of 47.7 million up over 70% from last year at in a debt free balance sheet.

While the environment remains uncertain, we continue to focus on improving our capabilities are offering our customer experience and really our entire go to market position as we seek to expand our market share of the heavily fragmented industry.

The attributes of our brand and product at resonated with consumers pre pandemic, namely the convenience of researching and transacting online on receiving the product vs that extract each of their door, where on the magnified during the pandemic EPS increase time at home led to increased spend on no.

Well at the Swift pivot to entirely digital when showrooms are closely followed by a return to our omni channel model. We have garnered tremendous learnings we have very current market research that helps understand on the subtle differences between our millennial and post millennial customers and how they are spending during the pandemic, we're tweaking our messaging and marketing tactics.

At these learnings we've also proven on numerous digital first tactics from one on one face time product demos to mass viewership Facebook why the dance and many others as well.

We estimate you have made over 2 million digital sectional demos over the past six months nearly all of these new tactics, we have teased out during this time, we will persist even after the shopping landscape returned back to normal and we're very confident in our ability to maintain high gross.

Even post pandemic.

Perhaps most importantly over the course of the pandemic. We have attracted many new customer school of Soc family. This growth in our customer file will yield benefits for years to come and we will make sure. We are using our sophisticated marketing approach to build engagement and drive attachment rates end lifetime value of these new customers.

We also still have less than two per cent unaided brand awareness with significant market share opportunities. So we'll build on these new customer gains as we lean into marketing supported by the very very strong ROI as Jack will discuss.

Despite the pandemic, we remain focused on the long term potential of the company and making progress on the strategic initiatives, we have in place to drive long term growth and market share gains.

We continue to make investments in support of our expected growth, while remaining agile and disciplined.

These include making the investments in infrastructure like our warehouse in California, and our new East Coast warehouse opening in Q4.

Continuing to bring back expenses that had been temporarily halted or reduce particularly on the marketing front end to drive even more growth.

Innovating on the product side, we continue to work and continue to target early next year for an exciting new product launch that will allow us to expand into at tangential category in the home.

Elevating the omni channel customer experience.

As previously discussed we rolled out our new E Commerce platform in mid August and we're seeing a very positive response to the improved user experience and functionality with new features such as appointment scheduling for showrooms.

Mr. Low time of Configurator pages gave configuration of functionality and additional customer experience improvements we.

We have experienced improved conversion driven both by mobile and desktop in addition to an increase in attachment rates.

On the sustainability U.S.G. front, we believe that loves Jack leads the DTC and furniture categories and its commitment to sustainability and SG initiatives building sustainable products and contributing to a reduction of furniture waste end landfills. They.

This is an endeavor that has been core to our DNA since the inception of our company guided by our design for life philosophy with substantial progress to date, including sourcing all of our of fixed upholstery fabric from 100% recycled plastic and repurchasing over 20 million plastic bottles and last year alone.

Our products are built to last of lifetime and design to evolve and next year, we will be improving our communication on our tracking and impact.

Adherents to our high bar for innovation and sustainability will we believe fuel market share gains in the current any of the new categories in which we will compete overtime as we make operating decisions in support of our purpose, which is to inspire humankind to actually buy lots of.

Yeah.

As we enter the final quarter of the year, we feel good about our business fundamentals on positioning we are pleased with our strong start of the fourth quarter, but of mindful about co. Good uncertainty, especially with the high volume shopping day that lie ahead at the possibility of holiday shopping shifting earlier on the season.

So overall, we are pleased with our third quarter results, which exceeded our expectations on the top and bottom line.

Against a pandemic impacting environment, we generated a positive adjusted EBITDA of $6 million, which of the first time, we've achieved profitability in the third quarter.

We have been very disappointing operating the business by stringently controlling expenses inventory and working capital some of which we recognize it's temporary at sales return. So also what costs, including marketing overhead end headcount.

As we begin the fourth quarter, we believe we're very well positioned to continue to drive demand as well as capitalize on the demand we have seen year to date for our unique products that are resonating with the consumer and we look forward to building on our success to date as we close out the fiscal year.

Before turning the colors of Jack I, just want to thank all of our associates for their hard work and dedication to our customers. During these difficult times at.

With that I will turn the call over to Jack to provide you an operational update and discuss the progress being made on our key strategic priorities.

Thank you Shawn and good morning, everyone on third quarter top line growth is a testament of our continued agility and ability at at the business to meet strong demand from new and existing customers.

However, and wherever they choose to shop at low side.

Our Q3, new customer metrics were reflective of the success. We are building awareness of our brand at attracting new customers total customer count went up 34% vs Q3 of last year, and we had an almost 40% increase in factional platform, new customers, both of which bode well for us going forward.

Now let me give you a quick update on our operations book showrooms and with our channel partners Huh.

Currently 100% of our showrooms are in the walk in price due to increased health and sanitation protocols.

I will discuss later.

We also operate under the assumption that this can change rapidly due to market conditions on.

On the channel partner front on.

I shop in shops are continuing to meet or exceed our expectations on subsequent to the ended the quarter. We have expanded our relationship with best buy to include selling sectionals on about five dot com.

Okay thing of product established and innovate of online retailers like best buy expands our brand awareness serving of another touch point.

During this action on shopping journey through this expanded partnership will be able to reach a broader audience and accelerate adoption of the factional platform.

We believe the best buy brand on the customer profiles of great fit with lot of Sac and.

I look forward to at successful and growing relationship together in addition, or Macy's shop in shops are opened.

We need to be productive.

In terms of our Costco pop up shops, while we had no physical pop up shops at this GAAP last quarter. We did habits, you test and then roll out to temporary on line pop ops lots at approximately four weeks ending in September and October and generating 7.7 million at total volume. We also have a third.

Show running now through December sales.

Importantly, our partner channel business development overall grew on profitability of the improved structure of these partnerships in spite of sales decline of 8% due to the change in the topic of business.

We're continuing to work on of long term agreement on the topic of business and we will provide a more detailed update on the best buy at Macy's partnerships, along with our Q4 results.

Throughout Q3, we made good progress on important strides on our long term strategic growth initiatives, which I will now discuss.

Shawn already covered product innovation, so I'll get straight into discussing our key initiatives, starting with you, especially on the marketing and merchandising strategies, we continue to drive more efficiencies and high returns from our marketing spend our core media spend this year generated 50% more incremental sales in the prior year media ROI increasing significantly.

Here at the last year, which is driven partially by an increase in showroom and touch points out as we've said before our showroom sort of his great amplifiers for our brand and the return of our marketing spend each.

Each one we opened is worth approximately one point of increase in ROI at.

In addition, we have been focused on using more tactics of dried reach further penetrate our target customer.

Non linear buys like Hulu and over the top media as well of targeting on linear by driving at higher reach.

Of these tactics, we believe our reach grew from 65% to 80% in third quarter of this year versus last year, which helped drive our media ROI moving forward, we'll continue to lean into non linear media.

Media as part of our buys to drive reach at both.

We have a role.

New merchandising approaches enabled us to build higher margin sales soon in our results of strong medium brand traction enabled us to deploy a lot of promotions, that's driving brand awareness attracts new customers to the business who are highly qualified and a result.

The conversion rate in both retail and online at our at some of the high levels. We have historically same.

Additionally, our merchandising strategies have helped to drive higher at bees end product mix towards premium at higher margin covers as well as higher catchment rates for new products. Shawn mentioned for example, our premium lob soft end down in sort of soft 10 percentage point increase in their mix year over year end Q.

Right.

Showroom operations during the third quarter, we opened 10 showrooms in non markets and ended the quarter with a total of 107 Chevron locations. We also opened on.

Just last week, our last year room at the year end Hoboken, New Jersey.

So year to date, we have opened 18 showrooms with one relocated showroom and opened in this fiscal year classified as new which brings our total share them openings for the year 19.

In this environment, we continue to learn a tremendous amount of refine our approach of operational excellence.

We've implemented increased health and sanitation protocols with at all at Star, which is our what we call our co bit operating model to include quite supply at the peak.

We're interaction point positioning showrooms to operate on the walk in pay for all of Q4 and the market conditions.

Developed and implemented a showroom mission control rolled through as of October at least lie on.

Spot appointment scheduling that we rolled out in November this system, which leverages Calgary platform similar to a restaurant reservation system that allows showroom poised to book private and one on one appointments virtual at weren't person with customers.

Currently implementing updates that allow customers to book of warm it's on the road seamlessly from our loves Saks Dot Com website, given the current environment. It's the feature of better customers I've asked for end has already been well received.

And as we move into the peak holiday weeks, we expected further resonate with customers who want one on one service.

Other income showroom features include leased line block demos fabric selection as watch pick up Weve also developed and implemented a proactive whos purchased specials roll, reaching out to rabun chairman customers drive gross purchase satisfaction, including Werent confirmation cracking communication end.

Delivery follow up.

In terms of showrooms staffing as previously mentioned all showroom managers and assistant managers shifted from traditional showroom environment here, one into a virtual trade area environment, you're too during the height of coke at 19, allowing them to sell virtually be at podium web chat show on managers also complete.

Added additional training to provide services such as customer lot of chat email on phone as low as return processing. We subsequently improve these that of our customer lot of department by nearly 20 points any significant reduction in wait times for a refund debt.

Demonstrating the impact of these improved as we flagged and adapt to this new environment.

Great.

In terms of expanding other channel presence and sales.

I've already discussed the current status of our best buy and Macy's partnerships will continue to pursue opportunities with other partners and we will provide you with updates when there is news of note.

Finally in terms of making disciplined investments on our infrastructure, including technology and supply chain first E commerce since launching our new E. Commerce platform at mid August we have experienced improved conversion driven by both mobile and desktop. In addition, we have seen an increase in attachment rates, which are now at 40% versus pre law.

<unk> of about 34% of Sectionals purchases included accessories accessories on now part of the purchase process the customer builds around setup.

Continuous improvement and functionality have been at at the site since launch including faster low time of.

The configurator pages appointment scheduling for showrooms, they configuration functionality and additional customer experience improvements as mentioned earlier, our customer response to appointment scheduling has been very positive at about 40% of our business now pointing at driven which is up from zero percent pretty code.

On the supply chain side, we continue to focus on reducing costs, increasing efficiencies on mitigating supply risk and our supply chain our regional DC in California is fully operating at a 150000 square feet. We are on track to open our east coast warehouse at the end of this fiscal year. In addition, we are engaged.

On a multi phase project the launch of supply chain management system, which will drive efficiencies in planning production management.

And order fulfillment functions positively impacting our ability to execute with excellence and supporting our goal to diversify our supplier base. We now have three production sources in three countries for sectional inserts.

In summary, we continue to be pleased for power needs of adjusted the environment in ways that will benefit.

On the long run we continue to learn to effectively of track on Burns and are building the profit the and infrastructure to deliver sustainable brand accretive and profitable growth at.

We look to the all important holiday selling season, we are continuing to leverage our growing media spend as well as preparing our showroom operations for traffic throughout the holiday season by initiating our appointments at them on the website as well as end show loans were very pleased with our progress on developing a truly omni channel brand.

On where the channels of working together seamlessly on.

But the more research and buying experience with that I'll turn the call over to Donna to review, our Q3 financials at it.

Few details related to our 2021 outlook.

Thank you Jack Good morning, everyone. I will begin my remarks with a review of our third quarter results and then provide a framework for how we are approaching the remainder of fiscal 2021.

The 43.5% increase in net sales of 74.7 million was driven by triple digit growth in our Internet channel on a 125.2% and a strong rebound of our showroom channel of 27.9%. This.

This was partially offset by a decrease in other sales of 8.7% driven by a decrease in on Costco in store pop up shops, partially offset by shop in shops, and the two temporary online pop ups on Costco Dot com at Jack discussed these.

These temporary online pop ups drove Q3 sales higher than expected as we have assumed no cosco net sales contribution when we shared expectation for Q3 sales growth.

Total comparable sales, which includes Internet channel net sales and comparable store rone point of sales transaction increased 53.5% in the quarter as a result of the 125.2% increase in Internet channel net sales.

And the 25.5% increase in comparable showroom sales. Please refer to our earnings press release for all of the details on our comparable sales performance.

My part of category are Sachin on sales increased 46.8% on.

Our Soc sales increased 30.6% and our other category sales, which includes decorative pillows blankets and other accessories increased 6.2%.

The 487 basis point increase in gross margin versus the prior year period reflects the 535 basis point improvement in gross profit as the result of less promotional discounting favorable product mix shifts and lower product costs related to vendor negotiated tariff mitigate.

Asian initiatives. These were partially offset by an increase of approximately 40 basis points in distribution and tariff related expenses.

We exceeded the third quarter gross margin expectations, we shared with you on our last call what the upside primarily driven by less promotional discounting and more favorable product mix than we had anticipated in.

In addition, we realized benefits from vendor rebates in the third quarter that we had previously expected to come in Q4, and the expected step up in freight and warehousing costs with lighter than planned due to a shift in timing of projected inventory receipt.

The modest 6% year over year increase in SGN $8 reflects the impact of our co did related financial resilience measures.

The year over year increase was driven largely by increases in employment costs increased rent associated with the 107 showrooms an increase in equity compensation relating to the modification of stock option and credit card fees related to the increase of Internet and show on sales.

These increases were partially offset by a decrease.

In in store pop up shop fees related to the decrease in in store pop up shop sales and decreased overhead expenses as a result of co. The 19 related travel restrictions.

As <unk> as a percentage of net sales decreased approximately 1228 basis points, resulting from the leverage of employment cost selling related expenses, such as credit card fees and pop up shops seen rent equity compensation and expenses related to co. The 19 risk.

Such and such as trial.

As gionee expenses, approximately $5.1 million lower than our expectations principally related to the continuation of our financial resilience measures that resulted in a deferral of professional fees and payroll related to delayed hiring.

Our investments in advertising and marketing, which benefited extended period increased by $3.7 million or 75 basis points of 14.7 per cent of net sales in Q3 due to increased media and direct to consumer program spend which contributed to the third quarter sales increase.

Yes.

This increase was approximately $1.9 million lower than planned due to a shift into the fourth quarter to support the promotional activity as well as test and learn initiatives, we have planned for the fourth quarter.

Depreciation and amortization increased $476000 from the prior year period to $1.9 million principally related to capital investments for new end remodeled showrooms.

In the third quarter of fiscal 2021 operating income was $2.5 million compared to an operating loss of $6.9 million in the third quarter of last year, driven by the sales and gross margin increased as well as as gene a leverage I just discussed.

Our net interest expense of the third quarter was approximately $47000 principally relating to the unused line fees on our revolving line of credit.

Tax expense in the third quarter of fiscal 21 end 20, well.

It was not material in relates to minimum state income tax liability.

Before we turn our attention to net income net income per share and adjusted EBITDA. Please refer to the terminology in reconciliation between each of our adjusted metrics and their most directly comparable GAAP measurements in our earnings release issued earlier today.

Net income was $2.5 million or 16 cents in diluted earnings per share in the third quarter of fiscal 2021 compared to a net loss of $6.7 million or 46 cents diluted earnings per share in the third quarter of fiscal 2020.

We generated positive adjusted EBITDA of $6 million as compared to an adjusted EBITDA loss of $3.7 million in the third quarter of last year.

Turning to our balance sheet, our liquidity remains strong as we ended the third quarter was $47.7 million on cash and cash equivalents and $19.2 million in availability on a revolving line of credit with no outstanding debt on the revolver.

In terms of outlook given the continued uncertainty around call. It 19 related disruption, we're not providing formal net sales guidance.

We are pleased with the start of fiscal Q4, but it's unclear how much of this represents an early start at holiday season.

In addition to the cases continue to increase creating uncertainty and we have very large volume holiday shopping day is that still lie ahead.

Finally, we have three temporary online pop ups with Cosco planned for the fourth quarter versus the two executed in the third quarter.

As a result, while we currently feel confident in our ability to generate healthy year over year net sales growth, we do not expect it to be at the level of rate we reported in Q3.

From a profitability perspective, we still expect expansion in adjusted EBITDA margin rate as gross margin leverage offsets planned operating expense de leverage.

The tailwinds of less discounts and the benefit of cycling Paris combined are expected to more than offset freight and supply chain cost pressures on the gross margin for on well shifts in spend will result in operating expense de leverage.

Therefore for the fourth quarter, we expect a strong did de to 60% year over year increase of adjusted EBITDA from the $8 million level reported in Q4 last year.

We continue to expect to generate cash from working capital this fiscal year and our expectations still reflect the capex will be in the $12 million to $14 million range.

So in conclusion, we had a very strong Q3 from both the net sales and profitability perspective, and we look forward to closing out what has been an unprecedented fiscal year, having made significant strides across all areas of the business.

We will build on this progress in fiscal 2022 and beyond as we position loves Soc for long term growth generating value for all of our stakeholders.

With that we would now like to turn the call back to the operator, who opened it up to questions operator.

Thank you at this time of the conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad a confirmation total indicate your line is in the question queue you.

You May press star two if you'd like to remove your question from the Q per participant using speaker equipment. It may be necessary to pick up your handset before pressing the star key one moment, please pull for questions.

Thank you. Our first question comes from the line of Thomas Forte with D.A. Davidson. Please proceed with your question.

Great. Thank you, so Shawn Jack and Donna Please stay well I have one question and one follow up.

So Shawn at a high level I wanted you to.

Oh pine on to what extent co Goodnight team has had a positive impact on the lifetime value of your customer and your customer acquisition cost and to what extent that benefit of short term in nature and longer term in nature, and then I have a follow up question.

Yeah, I'll give that at a quick comment and then allow Jack just fill in any blanks I you know, it's a dynamic environment I'd said at least and I think that in many cases per screen at home category, Obviously look Soc and like companies had been recognized as perhaps code at 19.

Same beneficiaries of people working from home and spending money on their home.

So while I believe that.

Much of.

Our success of late has been due to the agility of the team and our ability to react to the environment. We certainly recognize these tailwinds and in our case rather than.

Seeing just increased sales as many of the category of seen depleted inventories of longer lead times you know there's so many.

Things I've tried to purchase myself as it at the consumer that you just can't get right now or you have to wait.

Much longer than expected at that.

It's not been the case for us because of the way we've managed assets and so the results of come out for us more toward the bottom line I believe in the near term.

And you know essentially I think we've gotten more for less just you know obviously, a smaller staffs on our front lines, having reduced at the very beginning buckling down per co bid at.

And and also the way that we're spending on marketing our ROI is there certainly high end, increasing partly due to the new tactics, but obviously on.

Aided by these these sort of tailwinds and so long term for US you know our outlook, we would still like to maintain high gross not just through new product innovation, which will come but also due to these the ongoing test and learn behavior that.

We've demonstrated for a long time, our commitment to innovation on the marketing front end and larger spends is at as we get bigger perhaps expecting the tailwinds to trail off and so far on the top line. We believe we can sustain high growth obviously the numbers get bigger at harder that's still on.

Outlook on the on the on the bottom line that the company is leveraging and you know of reaching debt at a critical mass where I think we're able to show leverage at the same time, we would expect some of that.

Tailwind to a trail off eventually end at.

End, but but time is on our side on on that from that standpoint, and so I don't think at we're at all ignorant to the kinds of we'll call it co tailwinds that.

Our debt.

Driving some some of our success at this moment, but we haven't let it be a runaway train and just drive sales through the roof and deplete our inventories had been very careful to manage that.

No Jack if you have anything to add to that I think you've covered a lot from them the sort of managing at situation on the only thing my observation is Tom from a market dynamics, if you're just looking at it from a consumer dynamics I think I'd.

Obviously with massive disruption we are at advantage to take advantage of that when you have a brick and mortar of disruption. So I think.

During the disruption of brick and mortar we clearly became a preferred choice among people, who didnt have as many choices as they did before and that's it at the tailwind that obviously won't last forever and obviously comes with its own costs. So I think we'll then when you look at just the long run that tailwind will go way, obviously, we all want it to.

I think in the long end, though that tailwind indicates an advantage for us as you look at some of the larger I think trends that are happening I think the headquarters moving out of the metro areas less headquarters being of focus I mean people are moving out of metro areas and I think focusing on homes agile.

Educating from home is becoming a new trend as wells wells working from home and I think home buying obviously for the next couple of years is probably going to be at an elevated level. Those from a really long term consumer trend make us feel very good end and the way that people are beginning to purchase and the way our product is designed at our service is designed.

It makes us feel really good really good about the long term short term very unpredictable.

At the last thing I'll add sorry is is I think that.

Often.

I've said on his love sex greatest opportunity at.

Perhaps strength in the marketplace is our unique product and what I mean by that is.

We're not just of merchandise are capitalizing on the macro tailwind we have a product at still most people on the furniture shopping category don't know about end is in our humble opinion superior to.

It's competitive products in many many ways and so the adoption of our platform, which of the sticky platform, which drives repeat which you know obviously has a very high customer satisfaction rating.

It's something that we'll grow on we believe on itself as as more people adopt the platform and reviews go up and word of mouth increases. So will this so will the platform growing. So this I guess kind of tailwind for us is fantastic from that standpoint, and helping to push us further day.

On that path and increase the speed at end and weight of that flywheel and so I think that that's that's one unique aspect of this company is different than just on merchandize are capitalizing on a tailwind.

So excellent Shawn excellence Jack on so as my follow up then.

I've been very impressed with the way you've pivoted the use of your physical showrooms by.

By appointment shopping to drive digital engagement.

But collectively would you say that assuming that things were turned to some of my normal in the second half of calendar next year end, you're able to return them all to physical opened as they were in the past.

Is there a way to gauge the level of productivity at your showrooms and the potential for improvement if you're able to reopen them to the extent they were pretty pandemic.

Yeah. That's out there there are a lot of interesting things. We're looking at I I would just say this I think of that while we know there were some really interesting performances in shifts between performances between the the web and the showrooms as their openings and closings I would say the one thing we've learned at Theres an immense amount.

Between web and showrooms and what's really take taken place I think the biggest observation I would say is that versus a bifurcated shopping experience now, it's becoming an integrated where research is taking more place on line.

And are in the showroom, it's at closing opportunity and what that means for US is I think a couple of things I think it means huge opportunities for continued looking at how touch points operate relative to to.

Two web and touch points. All obviously included a number of options. They include shop in shops. They include a.

Potential concierge services. They include things like our share of rooms. They include kiosks and they include other relationships of what we're learning really right. Now is the go to market strategy has a lot more options at or would have a year ago and fear of making us feel really good about the productivity, we'll get out of our touch points in the future.

Great. Thank you Jack.

Thank you. Our next question comes from the line of Camilo Lyon with BTG. Please proceed with your question.

Thank you good morning, everyone really remarkable quarter here.

Congrats on that actually because of the first Q3 since being public debt you reach profitability.

So I want to touch on that first specifically on the gross margin front. If you could highlight maybe Don if you could just touch on where where are we in the tariffs will wind down efforts.

And how we should think about some of the.

Incremental costs that we should expect to see from the temporary cost from the distribution center opening here in the fourth quarter.

Really trying to understand and see because it seems like there's been a pull forward of the overall gross margin expansion relative to the time frame that had been laid out before so any color on the progress there would be very helpful.

Yes. Good morning, So yeah couple of things so probably the biggest impact on our gross profit margin expansion is the the discounting the promotional discounts on the reduction of promotional discounting.

And with some product mix shift into some of the higher margin items. We are when you asked the question at about how far are we through tariffs from a dollar standpoint, we still have about 42 per cent of our inventory purchases on predominantly on the copper sales.

Slide coming out of China. So we are still being impacted although less and less as we continue to go through the year. So.

You are seeing some year over year increase in gross margin because of the tariffs shift on but.

More of its coming out of the promotional discounting and some.

Vendor pricing negotiations to help us mitigate the tariffs that are still coming out of.

On relative to the products coming in from China.

Hope that answers.

So we still think yes Harris for you on we still will see cycle through our impacting on gross margin, but we believe at a lesser and lesser level you know as the years go on but we still do have some inventory coming in from China net.

Is impacted by tariffs and as far as the northeast warehouse.

On.

It's supposed to be fully operational by the end of the fourth quarter, which means staffed inventories going in and and so on and so forth on the startup costs are a lot less than we originally had anticipated on which is great. So we don't anticipate a significant impact on our gross.

Margin for the remainder of this year, even going into Q1 of next year relative to the startup costs relative to the northeast warehouse.

That's great to hear that's good.

Thank you for that color.

You know Jack and Sean if I could just ask a question on.

How you think about.

Coming back to at the the dramatic increase at you've had in your customers I think Jack you said, there's a there was up 34% increase.

And your customer file versus last year.

Right.

I'm curious to know how you leverage that data.

To extend that lifetime value, so taking what you've seen this year from any sort of covered related tailwinds and making those really sticky into into next year and beyond what at what's the strategy of thinking around taking that rapid increase in customers at you you for that you've achieved.

Yeah, I think that that's the beauty of I think that the excitement we have when we talk about the the platform approach to marketing. So once people buy into the Sectionals platform. We continue to innovate and work on new products within that platform and we talked a little bit about the tip of the iceberg things like attachment.

Rates going up from 30% to 40%, adding the storage seat.

Adding up the electrical charging components. So things are starting to really obviously help us and obviously there is of strong message in terms of out of the the lifetime value of the product and flexibility in buying covers at also at so in general what were seeing right now of while we've had accelerating new customer.

Rates, we've seen attachment rates and repeat rates and terms of purchases maintain and be very strong and I would expect with some of the innovations that we have coming in the next year so that.

That will only strengthen so we're very excited about the opportunity to leverage the platform of the innovation on our phone customers and we are seeing excellent trends right now Shawn I don't know if you want to add anything to that.

Yeah, I mean again for us each customer of special.

We are.

Our unique design for life proposition would have them being customers for life and we're very interested in those relationships are very interested in.

Delivering to them new ways to delight them and allow them to reverse compatibly add to their such loans and also essentially.

Get into other categories net designed for lifeway and so.

You know that's nothing but good news, we we take our customer.

Our customer lift very seriously and.

Do it at the major strategic strength of lot of Jack.

Yeah, I mean, the real business approach to it is we think there's more value in mining deep into the platform and adding innovation than there is in adding at on categories tons of accessories. So typically that will be the approach you go deep into the platform design things that are key to the platform. So you are saying.

Our core business of getting stronger there.

Yes, just to follow up on that I think it's fascinating that you've had this just trying this increase have you seen a deepening of your core consumer demographic or has it been they broadening of the demographic that's coming to the brand.

It's been pretty dynamic this year I would say, we'll probably be in at better position. After the fourth quarter to talk more details we have seen changes in the demographics, along with the debt with the disruption we've certainly seen a.

Our younger group come in I think especially with the online surge we saw that that is a different slightly different demographic than than that but at the core core of but typically what we're seeing across the board is strength on the business across all of the demographics really.

Got it on the best guys great job. Thanks.

Thank you.

Thank you. Our next question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your question.

Hi, good morning.

Thanks for taking my questions.

First off congratulations on a great quarter.

And I think [noise].

So of course question I have I think it's a bit of a follow up to the prior question.

Just with regard to promotional activity and of the positive benefits, we sought to gross margin.

Here in Q3 at a question I have is as.

As you look at the reduced promotional activity do you think that is a function of co.

Co bid at an extraordinarily strong underlying demand environment or is it starting to show that maybe there's greater overall.

Overall awareness.

Of of the above the lumps of love second and the products that that could suggest maybe promotional activity could be more subdued going forward.

[noise] boy, that's a that's a hard one so many different things are happening right now I think we're we're certainly.

You know happy to have benefited right now from the stickiness of the brand and the situation and allowed us to reduce our promotions at of critical time, obviously in the company and two of relate.

Really turn and pivot into profitability is a significant aware at I think in terms of long term I think we're going to continue to look at the opportunity in terms of what are the things, we do with our pricing and promotions to allow the the strongest long term growth of a sticky brand. So I think there's a lot we need to understand.

Day, and analyze about our customers on the value proposition before we think we have a real insight into that sort of long term effect of this but certainly in the short run it helps us make our debt. It makes our decisions a lot easier in terms of of how to think about how are we going to redeploy profitability.

Profitability into more marketing or we get I give it back to the customer are we going on you know doing a number of things went on really good situation that we can understand consumer trends take right make the right decision in order to grow as a super sticky <unk> co.

Customer of up brand.

And I think it's important to I think the most important take away for now is that while we are we're pleased to have been at beneficiary of some of these co tailwinds as opposed to the opposite of.

And we're simultaneously achieving more penetration of our brand more acceptance and again building that customer base that will support us going forward and also just credibility in the marketplace, which drives more sales because actually loans and new products. Like these are the kinds of things people are skeptical about until their neighbors have them or they get you know.

Those kinds of reviews, all of those things bode well for US right now, but that said at where you are seeing at play through is not just in topline growth for us in fact, less so than some in the home category, but again in profitability and in margin because we're able to get a little bit more for a little bit less and promote last and those sorts of things in this environment and so.

I think that we are still pretty.

Pretty cautiously optimistic about continued gross margin recovery about the go forward quarter, that's not to say that were.

Optimistic, but you know we don't want to get over our skis, we don't want the outlook for this company to get ahead of itself because we recognize those benefits in the near term coming through on the gross margin line, maybe a little bit prematurely coming through in or.

Net margin, maybe a little bit prematurely and it's good to go build on it. That's it you know it's been increased Ah I think.

Yeah, and I think im at short run as Dawn mentioned, if you you know the piece is putting together I think the increased margins and the ability to market with less disk.

Discounts bodes well for our investing than additionally, at our ability to scale on become a company. That's really strong in the next five years, which is where all of our focus is right now.

[noise] guys. That's really helpful. Then the follow up question I have of.

One of your view today and at a lot of companies. Just this I think it's very very smart, there's kind of caution towards the holiday given of potential pull forward demand or shifting demand dynamics through this.

Cope with 19 holiday so could of course had so if you look at your data.

Is there anything that you're seeing it with sales here. So far in Q4 that would suggest that actually has been a pull forward of demand or was it just more overall caution towards towards towards the season.

I'll take that and then lot of either Shawn or Donna finish it off I think right now we see it we certainly I think on.

No we do understand and know the shopping patterns have stretched out the holiday season and pulled it forward a little bit with that said, we are certainly very happy with where we are we're comfortable with with friends and.

You know I I think we feel good about the business right now as we go through the first the fourth quarter.

Yeah, I don't I don't think we.

Throw on the data can see anything that would.

Confirm or not.

Not confirmed that things had been pulled forward. We we we are again pretty pleased with the results. So far and remain cautiously optimistic you know for US fourth quarter is a big deal and we're at we were very pleased obviously to see profitability in that third quarter, which at the first time, we've we've seen that happen.

And we'd like these trends to continue and believe they can.

Thank you again congratulations.

Thank you. Thank you.

Thank you. Our next question comes from the line of Matt Koranda at with Roth Capital Partners. Please proceed with your question.

Hey, guys. Thanks for taking the question just wanted to start off on the guidance at the Fidus.

50% to 60% increase in EBITDA year over year any help on on sort of the revenue growth that we're assuming to get to that level.

Maybe you could just talk about revenue for the date what percent of your plan as book today, maybe at what are you counting on for the rest of the quarter.

Yeah, we're not we're not Matt.

Specifically given guidance other than we do expect on the.

Increased quarter over quarter in fourth quarter and not to be at is as much as you store Q3 this year over last year on.

On that's pretty much all guidance at we're getting along with the fact that we are indicating.

We do have three cosco.

On line pop ups book on.

For this quarter on so we are anticipating some net sales at contribution coming in from cost of as well on as far as the fourth quarter of.

Again, you know not fourth quarter started off strong, but we remain cautiously optimistic as both Jack in China of said, but as far as giving specific guidance as to what are our net revenues were on net sales are going to be on other than that not increasing as much year over year as third quarter.

That's the limited amount.

And a lot of has we have it's been you know what do we at December nine. So we probably have a couple of more weeks flipped at the stronger shopping weeks happening. So at this point, a fair amount probably more than 50% of of our revenue is probably from our projections.

Our end to the quarter.

Okay. That's helpful. And then just on the Costco Roadshow, France can you just confirm there was no physical virtual revenue in the third quarter and then maybe just talk a little bit about the online road shows and sort of your progress there. It sounded like they were pretty productive, but maybe just a little more color on that.

Yeah, Yeah, there were actually no no road show no physical road shows in the third quarter I think there was some confusion because I think there were some online advertisements from cosco. After they had been canceled that that made people think we had those so we did have the digital road shows a day did very well.

I'm very pleased with them, we hadn't done it before and end with little very little support were successful to the tune of I think the 7 million plus we discussed a we do plan on having a road shows in the fourth quarter as well we will be testing of three road shows and we're excited about.

In terms of long term go everything as you know tied to the overall discussion. So we're still working with them I think from last report from our last discussion.

In Q2, we were we were very sort.

Sort of cautiously negative I would say, we're now cautiously optimistic that we will get to a good place for for next year end, we'll inform you of any details of things, we can wrap things up with them.

That's great and then just if I could sneak one more at on on the gross margin fronts.

Got it could you just quantify the vendor rebate benefit in the quarter at I assume that doesn't repeat on the fourth quarter, but just clarify that for us.

Yeah. So it was I mean in dollars. It was probably about 950000, we do have a small amount.

Projected to come in in Q4, but not the magnitude of Q3 and.

That's comparative could probably about a million two that was in Q3 of last.

Last year in vendor rebates with no with no vendor rebates coming in the fourth quarter of last year.

Okay very helpful Rich I guess I'll jump back at thank you.

Thank you.

Thank you. Our next question comes on line of Maria reps at Canaccord Genuity. Please proceed with your question.

Hi, good morning on that thanks for the questions.

It sounds like you have a fairly successful shop in shop strategy can you maybe talk about how you approach of working with channel partners evolved over the past several months and what that might mean for growth and margin prospects.

Yeah, that's a.

That's an interesting question and.

I would say, we're very pleased with.

One is you do some of the background.

On a backup a little bit and we talk about some of the Costco history.

At the time of the profitability of Costco was not at the levels that we were seeing with some of the shop in shop opportunities and I think at really made us aware of that we can operate with partners at a brand of creative way and a very profitable way that's when when I mean, what we offer is obviously a really unique product.

With a lot of sticking with at an ability to drive sales at I think in a very productive way more productive than basically anybody else can do and obviously by partnering with the right partner, we we massively change our capex.

<unk> expenses on an investment.

And obviously, a reduced way, while maintaining touch point presence and what I would say is we're continuing to look at the touch point opportunities and I think the considerations are the ability to reach people the amount of capital we have to spend and our ability to drive traffic or our partners at though.

Moving to drive traffic relative to historical models and so if you think about of shop in shop with Cosco you have synergies between brand at ability to drive traffic.

That are pretty pretty high relative to the of the capes.

Capex cost when you would compare to for perhaps a classical showroom and a mall environment. So those of the opportunities. We're looking at I think what you'll see is continued growth in showrooms were committed to share rooms, but a continued increase in the mix of non traditional showrooms at our touch points strategy and a lot more.

At Com as we as we develop the specifics we're in a test and learn mode for the next six months in terms of touch points at will be we'll be giving you updates as we make decisions.

Thank you. Our final question. This morning comes from the line of at experiment with Craig Hallum Capital Group. Please proceed with your question.

Great. Thanks, very much for taking my question and I'll add my congratulations on the profitable third quarter on why did he just asked about the showrooms on Jack It sounds like you just kind of touched about at there at the end of at the last question. There, but you know you opened 10 showrooms in the third quarter I think that Oh I can remember correctly. The most you've opened in in EPS.

One quarter or was that just maybe a little bit of of pent up demand from showrooms that you weren't able to opened earlier in the pandemic or are you seeing some really good real estate opportunities out there, but anything you can share with us about the performance of of your new stores at what opportunities you're seeing on the real estate front will be helpful.

Yeah look our showrooms the 10 at I will attest to this is our team did an amazing job, but there was no intention originally chop, which opened all 10 in the third quarter, it's really based on.

The co that impact and the impact of working with businesses and construction and approvals and everything else. So that was really deals had already been committed to that were squeezed into the back end of the year now as we go forward clearly with any kind of disruption like disagree.

On its opportunities so we see dramatic changes and opportunities in terms of a real estate dealmaking at values as well of options in terms of as we increase our ability to drive our own traffic, we inherently creates significantly more options in terms of creating touched on.

It's at or less capital intensive and perhaps have less less expensive lease rates that we have so I think I think what you'll see is a more diversity as we go forward with our touch points strategy.

Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to Mr. Nelson for any final comments.

[laughter] so much to all of our investor.

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Who cover US we are grateful.

Particularly for our.

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[laughter].

Good.

You can do your continued support thanks, so much.

Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.