Q2 2022 Lovesac Co Earnings Call
Greetings and welcome to the Love Sac second quarter fiscal 'twenty 'twenty two earnings conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
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Please note that this conference is being recorded.
At this time I'll turn the conference over to Rachel Schacter of ICR, Rachel you May now begin.
Thank you good morning, everyone with me on the call is Shawn Nelson Chief Executive Officer, Jack Krause, President and Chief operating Officer, and Donna download Chief Financial Officer before we get started I would like to remind you that some of the information discussed will include forward looking statements regarding future events and our future financial performance.
These include statements about our future expectations financial projections, and our plans and prospects.
Actual results may differ materially from those set forth in such statements.
For a discussion of these restaurant uncertainties you should review the company's filings with the SEC, which includes today's press release.
You should not rely on our forward looking statements as predictions of future events.
All forward looking statements that we make on this call are based on assumptions and beliefs as of today and we undertake no obligation to update them, except as required by applicable law.
Our discussion today will include non-GAAP financial measures, including EBITDA and adjusted EBITDA. These non-GAAP measures should be considered in addition to and not as a substitute for or isolation from our GAAP results.
Conciliation of the most directly comparable GAAP financial measure.
Such non-GAAP financial measure has been provided as supplemental financial information in our press release.
Now I'd like to turn the call over to Shawn Nelson Chief Executive Officer of the law that company.
Thank you Rachel good morning, everyone and thank you for joining US today I will begin by reviewing the highlights of our second quarter financial and operational performance before Jack outlines our second quarter progress on our key growth initiatives Donald wrap up our prepared remarks with a review of our financial results and a few other items related to our outlook.
We are very pleased with our second quarter results as the momentum from Q1 continued into Q2, and we achieved our highest quarterly growth rate ever reported as a public company. This was on top of the 28, 7% sales increase we reported in Q2 last year, our 65% quarterly growth.
Right in Q2 is even more noteworthy when taking into account that it builds upon three years of a sustained 44% CAGR with only a slight attenuation in our growth rate last year during the pandemic, even with limited showroom operations at that time.
Even on a two year basis, we're achieving very strong results.
Bottom line, we believe our continued success stems from the huge gains we are making as a brand in terms of awareness and conversion while actively managing the tight supply chain environment.
We remain almost always in stock delivering nearly all orders direct to the consumer just days.
Without the active pandemic and amidst a turbulent supply chain backdrop.
Customers are recognizing the competitive strength of our unique product and our notable in stock positions, which is evident in our Q2 results and our continued market share gains.
Strength on strength in demand, we continue to experience now gives us confidence to test into new pricing and promotional scenarios to drive margins over the long term.
Now, let me review the highlights of our second quarter performance.
Total sales were 102.4 million up 65, 4% versus the prior year period, including 290.9% growth in comparable showroom sales.
We delivered total comparable sales growth of 39, 5% and continued to be very encouraged by the broad based strength from both new and existing customers.
Strong growth across our showroom and other channels with a decline of Internet sales reflected a channel shift back to our showrooms are now fully opened.
Adjusted EBITDA significantly increased to 12.4 million for the quarter from $4.0 million in the prior year period, driven primarily by gross margin expansion and we also saw SG&A leverage which Donna will discuss further shortly.
Our strong second quarter and fiscal year first half 'twenty. Two results continued to reflect a combination of a strong demand environment, along with our execution against our key strategic initiatives, including product innovation.
Marketing and merchandising strategies creative utilization of our showrooms and other channels to expand customer touch points and making disciplined infrastructure investments.
Jack will discuss in detail our progress on our key growth strategies. So I will just focus on some key quarter to operational highlights starting with our brand presence across showrooms and channel partners.
We opened seven showrooms during the quarter and remain on track to open 28 total for the year showrooms remain an integral part of our Omnichannel strategy. That's my Dot com continued to perform well with demand sales, increasing 44, 3% versus Q1.
We are on plan to open more best buy shop in shops for the second half of this year and into early next year with preliminary plans to open over 15 additional shop in shops.
Additionally, Costco Roadshows continued to perform well and exceed our expectations.
Regarding product innovation, our teams are constantly coming up with new and innovative ideas to complement our sectional and shot platforms. Two weeks ago. We celebrated the launch of the very limited edition Sac covers created in collaboration with international fashion designer, Jeremy Scott Jeremy is the face of the Italian fashion House Mosquito.
And then making the cut T. V series initial sales are strong in key placements a few handmade Jeremy Scott Qatar sacs are landing with major celebrity names now too.
To that end, we have already seen exposure for this high profile collaborations with key outlets like us weekly and height east.
In terms of our major product launch we are planning for an introduction to an announcement before the end of this third quarter and we are very excited to finally bring to market as long anticipated new and patented innovation that we are confident that loves that customer will be very excited about.
In terms of our marketing and branding efforts, we continue to be pleased with the results of our marketing campaigns.
These efforts are driving higher than expected marketing rois based on what we see as very strong leading indicators of brand strength Jack will elaborate on this further.
As it relates to the broadly discuss supply chain backdrop, we like others in the industry are facing supply chain headwinds, which we view as more temporary in nature.
Through numerous tactical adjustments and promotional pullbacks, we have actively managed gross margins higher in the first half of the year as a hedge against the rising costs with inbound freight due to container shortages in shipping inflation.
As you are aware, we have deliberately and strategically built a geographically diverse supply chain with manufacturing in Malaysia, and Vietnam, along with China, and Indonesia, as well as the U S to create redundancies that we view as critical to ensure short lead times and strong in stock positions.
We have deep and tenured relationships with our partners and represent a significant portion of their business to illustrate in reaction to recent COVID-19 escalation in Vietnam, Our Vietnam manufacturer built more dormitories on site to provide housing for more employees wishing to voluntarily shelter onsite and continue working through the pandemic to avoid shutdown.
Yeah.
While just one example, it illustrates the importance of our business to our key vendors. Many redone at geographies. In addition over half of our vendors have been working with us for more than a decade. These strong relationships have provided us with unique strengths and allowed us to stay ahead of the curve as we navigate current challenges in the supply chain environment.
We are working to mitigate the intensifying supply chain headwinds through a variety of efforts. These include redirecting more P. O's to China building on hand, raw materials inventory here in the U S.
Inbound freight to more U S ports and using translate services leveraging airfreight for our top selling cover skus.
On the ESG front, we look forward to making our first ever formal ESG disclosures and reporting in Q4. This year. We also continued to develop our circle to consumer or CTC philosophy and plan to deliver more high quality sustainable manufactured product platform in multiple categories across the home space.
With services and programs that will help us build long term relationships with our most valued customers.
PTC is the next evolution beyond the DTC business model, where the DTC model focuses on delivering goods direct to the consumer and the most efficient ways CTC does the same but further requires a commitment to a circular way of doing business that is more localized looped and long term focused.
T T C way of doing business will not only deliver more sustainable outcomes over time, but it will propel loves that to become more competitive as a brand in the marketplace and more compelling to customers through our focus on long term outcomes.
Our products are already last far longer than most and are thus more sustainable in that way paired with programs and encourage more customer interaction services that surprise and delight. These precious customers. We believe we will not only keep them engaged with us but can win them over with our next round of product introductions that will follow.
Years to come.
So in summary, we are extremely pleased with our second quarter results from both a financial and operational perspective.
Our business is very well positioned within the home furnishing category and our continued strong results are reflective not just at the strong demand environment, but importantly, a result of our category disruption industry, leading in stock positions and market share gains as we look to the remainder of the year, we expect the environment to remain.
Dynamic and we are faced with the same type of supply chain conditions, you've heard discussed by so many.
Our diversified supply chain and mitigation tactics give us great confidence in our ability to navigate the challenging supply chain environment, while we remain focused on executing against our key growth strategies to drive long term value for all stakeholders.
With that I'll hand, it over to Jack to cover our strategic priorities and progress Jack.
Thank you Sean and good morning, everyone. We're very pleased with our second quarter results and the strides we have made against our growth strategies, which I will now review starting with one efficient marketing and merchandising strategies. Despite increased cost per click are established digital marketing strategies and tactics, coupled with newer initiatives like <unk>.
M S marketing hyper local advertising in consideration advertising are driving higher than expected marketing rois based on what we see as a very strong leading indicators of brand strength. One overall media ROI continues to perform above our benchmarks brand health has seen tremendous growth since pre pandemic.
Particularly within awareness and perceptions on quality value and style within target audience.
<unk> of awareness for purchasers seems driven by T V and word of mouth with word of mouth growing the fastest overall.
And overall digital seems to be filling the top of the funnel more frequently than last year, social CPM continues to increase on core channels, but this has been offset by higher conversion rates. We expect overall media to continue to see cost pressures, but anticipate offsetting.
Higher conversion.
We have scheduled refresh of television and social creative during the second half of the year. We also have testing planned on new social channels, including Tictoc Snapchat and read at least.
These tactics combined with the strengthening of the brand proposition and advantaged inventory position have enabled us to shorten as well as reduced promotional campaigns and discounting.
By approximately 900 basis points year over year in the second quarter, which is a key driver in helping us mitigate the supply chain headwind impacts our merchandising strategies are also driving continued mixed benefits as customers are increasingly gravitating to the premium priced and higher margin love soft covers.
On the Omni channel front, we have added additional automated touch points to support showroom conversion, including a quote figure email, which was launched in the second quarter. This is aided in stronger showroom conversion and the teams are collectively looking to iterate customized further and seek out new areas to create automation for an omni channel success.
Second area showroom operations, we opened seven showrooms in the second quarter and remain on track to open 28 for.
For this year.
Our showrooms continue to be an important part of our omni channel strategy and added capabilities.
Like on the spot scheduling and Chevron post purchase specialists are enhancing the shopping experience throughout the second quarter. The post purchase specialist team continued to expand their reach across both physical touch points and E. Com customers. In Q2. These post purchase specialists communicated with more than 90% of loves that customers.
Whose purchases met the predetermined dollar threshold for their service and on average drove.
A five point lift in post purchase piece that for customers, who are engaged with a post purchase specialists versus those who did not.
Customers continue to leverage one on one appointments services, even as showrooms returned to normal operating models. These appointments continue to drive stronger results than a traditional walk in customer converting it over 40% accounting for approximately 17% of showroom demand year to date.
We continue to plan to test the new customer touch point in the second half by incorporating up to 10 branded kiosk and our real estate strategy. These locations will be initially focused on trade areas, where our core consumers live but our brand is not yet represented by a physical touch point, we will also be testing a mobile concierge service in several markets.
They will also serve as additional touch points in trade areas, where we have an opportunity to gain incremental business and an asset light manner.
We continue to monitor the pandemic situation carefully and prioritize the health and safety of our customers and team members. We learned a lot in 2020 and have plans in place for a variety of operating scenarios.
Third area expanding channel presence, we're very pleased with the strength of the Costco business, which we're hosting our online roadshows directly on the Costco Dot com, we've seen productivity increases year over year, driven by an expanding premium copper offering and love soft we're looking to expand our presence digitally with four shows and to sack events.
Plans for the second half and we're also exploring potential physical touch points in the future as well.
We continue to be excited about the partnership with best buy and remain on track with our expansion plans to open more shop in shops in the second half and early next year with preliminary plans to open 15 additional shop in shops. We've also seen our best buy dot com business increased by 44% versus Q1 in terms of demand. This is.
Due to improvements in our customer experience on bestbuy dotcom as well some marketing tests that we've run.
We will continue to pursue opportunities with other partners.
Area, four making disciplined infrastructure investments starting with e-commerce in the second quarter conversion rate improved 33% over last year with the most significant growth in mobile conversion rate from which we see most of our traffic.
Elevating customer experience remains a focus and in Q2, we launched almost 20 associated enhancements, most notably an upgrade to the product configuration experience introducing new technology to improve the visual quality of the product covers rendering them much more true to life in the three D experience. Another major enhancement is the.
Actions of Apple pay to the checkout experience, which significantly shortens the conversion funnel for customers utilizing that payment method.
Regarding supply chain updates.
We continue to make improvements across areas, including delivery, reducing costs, increasing efficiencies and mitigating risk we have secured additional space in Illinois, Pennsylvania, and California to get in front of the holiday demand as well as next year's demand and notably our year over year footprint grew by over 45% year over year.
The second quarter.
We remain focused on inventory investment due to longer lead times and this will be evident in our second half inventory levels like others, we're contending with freight and cost pressures and port delays and localized temporary raw material shortages as Sean mentioned, we have implemented several mitigation tactics to help offset this disruption.
So in summary, we continue to scale the brand in the business. That's underscored by our strong quarterly performance, which punctuates 14 consecutive quarters of 25% plus growth since going public our brand is gaining traction with word of mouth driving the biggest year over year changes in awareness at the same time.
Our value proposition continues to grow despite a reduction in promotions and our teams have done a great job in managing our inventory position as we look to the back half of the year, we will continue to capitalize on our competitive advantages and leverage our strong in stock inventory position, along with a great value proposition and.
Thing to optimize demand and margins with that I'll hand, the call over to Donna to review, our second quarter financial results Donna.
Thank you Jack Good morning, everyone. I will begin my remarks with a review of our second quarter results and then provide an update on the framework I shared with you last quarter as it relates to how we are approaching the remainder of fiscal 2022.
Net sales increased $45.0 million or 65, 4%.
$6.0 million in the second quarter of fiscal 'twenty 'twenty, two as compared to $70.0 million in the prior year period.
This net sales increase was driven by both our showroom and other channels.
The increase in these channels was partially offset by a decrease in our Internet channel net sales against the period of elevated digital sales last year, given the pandemic related showroom closures and shift to online purchasing.
Net sales increased $56.0 million or 387, 1% to $68.0 million in the second quarter of fiscal 2022 as compared to $21.0 million in the prior year period.
This increase was due primarily to a $43 million increase in comparable showroom point of sales transactions, just $55.0 million in the second quarter of fiscal 2022 as compared to $21.0 million in the prior year period due to limited showroom operations in the prior.
We're here as a result of COVID-19, as well as the sales shift back in.
Into in person shopping.
As a reminder point of sales transactions represent orders placed through our showrooms, which does not always reflect the point at which controlled transfers to the customer and when net sales were recorded in.
In addition, we opened 26 additional showrooms since the second quarter of last year, which was a meaningful driver of the non comp showroom sales increased.
Other net sales, which include pop up shop and shop in shop net sales increased seven 4 million or 243, 4% to $14.0 million in the second quarter of fiscal 2022 as compared to $3 million in the prior year period with.
This increase related to more online pop up shop events this year and the reopening of our shop in shop locations that were closed in the prior year quarter due to COVID-19.
Internet net sales sales made directly to customers through our ecommerce channel decreased $22.0 million or 36% to $34.0 million in the second quarter of fiscal 2022 as compared to $47.0 million in the prior year period with a year over year decrease driven by the <unk>.
Comparisons against elevated digital sales in the prior year period, and the channel shift back to our showrooms, which were all open during the second quarter of fiscal 2022.
By product category, our sectional net sales increased $66 five per cent fact next sales increased 48, 9% and our other category net sales, which includes decorative pillows blankets and other accessories increased 192, 6% over the prior year quarter.
Turning to our gross margin to 749 basis point increase over the prior year period was driven by a 506 basis point improvement due to a reduction in promotional discounts higher overall sectional product category net sales and premium covers mix impact and also lower product.
Costs related to vendor negotiated tariff mitigation initiatives due to higher volumes.
Distribution expenses improved by 243 basis points over the prior year period due to a leverage of 793 basis points in warehousing and distribution costs relating to higher net sales volumes.
This was partially offset by an increase in inbound freight costs of 550 basis points due to escalating inbound container costs as well as some shifts in the inventory purchases back to China, which are impacted by the 25% tariff rate. This ship is to help alleviate container.
Congestion coming from our other overseas vendors a diversification of our supply chain allows us to continue to be nimble and shift inventory purchases between vendors to ensure that we remain in stock for most if not all skus.
We exceeded the second quarter net sales and gross margin expectations, we shared with you on our last call.
The increase in net sales was primarily driven by higher sales volume during key events such as July 4th combined with lower promotional discounts during these periods.
The increased gross margin percent in the second quarter of fiscal 2022 as compared to our second quarter guidance and prior fiscal year period was the result of continued supply chain headwind mitigation efforts such as reductions in promotional discounting initiated during the first half of the fiscal year, which was done to her.
Help soften the projected gross margin impact of the increasing cost of inbound freight on the second half of fiscal 2022 that most if not all in sweaters are experiencing. In addition, we also realized benefits of higher leverage on warehousing and distribution costs originally projected.
Due to the higher net sales volume.
This 51, 3% year over year increase in SG&A was driven largely by an increase in employment costs as we need some HQ and showroom hires that was put on hold last year due to COVID-19.
We also had higher rent expense related to the 26 additional showrooms and higher selling related expenses with the increase in net sales.
Partially offset by lower negotiated online public subsidies as compared to the prior year period.
Overhead expenses increased primarily due to higher equity compensation expense, resulting from an acceleration of expensing equity compensation related to a trigger event in the second quarter as well as in infrastructure investments to support our continued growth.
SG&A expense as a percent of net sales decreased three 2% due to expense leverage multiple areas, such as infrastructure investments rent insurance and selling related expenses.
Partially offset by a deleverage in employment costs and equity based compensation and travel.
Deleverage in certain expenses relate to the investments into the business that were put on hold in the prior year related to COVID-19, as we anticipated and which we discussed on our first quarter earnings call.
SG&A expense was lower than our expectations in the second quarter principally related to the delay in hiring to the level that was anticipated in both our headquarters and showroom locations and the shift of some of our infrastructure investments into the second half of the fiscal year. These.
These shifts were partially offset by higher credit card fees related to the increase in net sales for the quarter.
Advertising and marketing expenses increased $14.0 million or 81, 9% to $13 million in the second quarter of fiscal 2022, as compared to $9.0 million in the prior year period due to the reinstatement of marketing spend to support sales growth and showroom locations.
We're fully open.
Advertising and marketing expenses were 12, 7% of net sales in the second quarter of fiscal 2022 as compared to 11, 6% of net sales in the prior year period.
The 116 basis point increase was due to increased media activities and higher media costs compared to the prior year period, which was impacted by COVID-19.
Depreciation and amortization increased $100000 from the prior year period to $7.0 million principally related to capital investments for new showrooms.
In the second quarter of fiscal 2022 operating income was $9 million compared to an operating loss of $1 million in the second quarter of last year with the increase driven by the net sales and gross margin increase as well as the SG&A leverage just discussed.
Net interest expense for the quarter was approximately $45000 principally relating to unused line fees on our revolving line of credit.
Tax expense in the second quarter of fiscal 2022 was $515000 as compared to $34000 in the prior year period related to minimum state income tax liabilities.
Before we turn our attention to net income net income per diluted share and adjusted EBITDA. Please refer to the terminology and reconciliation between each of our adjusted metrics and their most directly comparable GAAP measurements in our earnings release issued earlier today.
Net income was $12.0 million or <unk> 52 cents per diluted share in the second quarter of fiscal 2022 compared to a net loss of $2.0 million or eight cents per diluted share in the prior year period.
We generated adjusted EBITDA of $12 million in the second quarter of fiscal 2022, as compared to adjusted EBITDA of $4.0 million in the prior year period.
Turning to our balance sheet, our liquidity continues to remain strong as we ended the second quarter with $73.0 million in cash and cash equivalents and $27.0 million in availability on our revolving line of credit with less than $1000 of outstanding debt on our revolver related to the timing of the <unk>.
A b L fees being charged to the revolver.
Please refer to our earnings press release for other details on our second quarter fiscal 2022 financial performance.
Regarding our outlook as we said during our Q1 earnings call. We are still operating in a pandemic environment with a wider range of potential outcomes as it relates to fiscal year 2022.
Given this we are not providing formal outlook for the full year, but we will share an update on the framework that we provided during that call that will helpful. As you are updating your models.
We are targeting another year of strong sales growth with approximately 28 showroom openings and we expect to restore expenses that were pulled back in fiscal 2021 due to the pandemic.
We will continue to strategically make infrastructure investments to support the substantial multi year growth opportunity that lies ahead.
With the additional showroom openings and strong year to date performance in a scenario where sales growth is in the mid 40% range.
We would expect adjusted EBITDA margins in the 6% to 7% range with a year over year adjusted EBITDA margin decline driven by both gross margin pressure of approximately 150 basis points as compared to the prior fiscal year as we like others in the industry are facing intensify.
<unk> freight headwinds as.
As well as the expansion infrastructure dynamics I just discussed we have been and will continue to be very disciplined on the expense side to help offset the gross margin pressures.
For our fiscal third quarter, we expect sales growth of approximately 50% with negative adjusted EBIT dollars in the $3 million to $4 million range compared to positive adjusted EBITDA in the same quarter last year.
Adjusted EBITDA is being impacted by the expected lower gross margins of approximately 530 basis points year over year due to the increasing supply chain headwinds and the efforts being placed on strategic expense reinstatement and infrastructure investments needed to support the growth of the company.
They were put on hold in fiscal 2021 as part of our COVID-19 financial resilience measures.
We are still expecting to end fiscal 2022, and a healthy cash and cash equivalent position and now expect capex to be in the 17 million to $18 million range, given our current view of 'twenty or eight showroom openings this fiscal year versus prior U of twenty-five shared last quarter.
So in conclusion Q2 exceeded our expectations from both the net sales and profitability perspective, as we look back on the last 18 months what stands out is the execution of the outstanding Love sack team members, who despite the COVID-19 and supply chain challenges have driven exceptional result.
We could not be prouder of their great work and we are all focused on being nimble and flexible as we continue to navigate a dynamic operating environment and position loves shaq for sustainable long term growth.
With that we would now like to turn the call back to the operator, who can open it up for questions operator.
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Thank you.
Our first question is coming from the line of Tom Forte with D. A Davidson. Please proceed with your question.
Good morning. This is Clarke rights from D. A davidson talking on behalf of Tom Ford Jo Thanks for taking my questions. My first one just for you guys would be from your vantage point do you think consumers have scaled back their purchases in the home category Burbridge pointed it seems clear to us that theyre spending more money on travel is reflecting the TSA throughput data.
Hey, Clarke this is Jack I'll start that and Sean or Donna. Please please add onto it.
I think what we're seeing due to the disruption we're making in the industry that we're not seeing any dynamics industry wide in terms of changes in buying behavior as it relates to our brand as we discussed earlier, we're seeing conversion rates that are higher than they've ever been which is which I really think as we are winning in the awareness to decision making.
Part of the funnel, which is farther down than obviously consideration. So while there are things happening I think in the macro market, which had been headwinds or tailwind for some of our competitors that are in more of a static growth rate. We are seeing continued.
Continued strength based on all of the measures we do for brand health. So.
I can't really comment on on this the sector changes because we just can't see those within our brand data right now.
Thank you and then just my second question would be.
Even with the challenging supply chain, you're able to get consumer couches faster than the competition do you think this is a greater even greater.
Competitive advantage today.
Yeah, absolutely. We know it is I think part of obviously part of the purchase product processes to get the product and enjoy it and use it and we are continuing to have industry leading.
Our service levels, which we're very proud of driven by not only <unk>.
<unk>, that's evergreen in nature, but a series of decisions that teams have made to really put us in a great stock position. So it is clearly isn't.
This environment, giving us a competitive advantage that we really want to take advantage of because we continue to you know while there was a pandemic going on our objective is to disrupt the category and continue to gain share, which we are doing.
Thank you recover.
Thank you.
Next question is coming from the line of Camilo Lyon with BTG. Please proceed with your question.
Thank you great quarter, congratulations on the results in a very tough environment.
I first wanted to ask Don if you could just unpack.
The components of the Q3 gross margin expectation the decline on a 530 basis points I'm. Just if you could just articulate the puts and takes around that.
And also if you could quantify.
What the infrastructure expense that was pushed out from Q2 into the second half how much that was and then I have a follow up.
Yeah. Good morning, so yeah, the the puts and takes on the gross margin.
Essentially net net they'd be the negative impact is a 100% related to inbound freight.
And we're no different than other importers were currently seeing an 85% increase on our container costs coming in from overseas.
And then there was a slight piece of that too that relates to R. R.
Our diversified supply chain, which gives us an advantage as well, so where we see container congestion maybe coming out of.
Vietnam, we're able to shift inventory purchases over to our vendors in China.
And we know that the inventory that comes in from China is impacted by tariffs, but it allows us to stay in stock on our inventory, which is super important to us as it is to our customers.
We have we have and we continue to reduce promotional discounting which is helping us mitigate those and I think on an overall given the 85%.
Container increase.
The impact in the way that we've been able to mitigate in the first half of the year seeing these costs come down the line to only have well, saying 150 basis point impact on our gross margin year over year has been very strategic for us.
Yeah.
That just does that answer that piece of the gross margin question and then on the does that camilo.
Yeah. So just to clarify you are you you're talking about.
Q3, total gross margins have been down 530 basis points, given all the puts and takes that you just articulated okay. Yeah.
Okay, Perfect and then and then just the infrastructure spend and how much of that has been pushed out of what you thought was going to happen in Q2.
That now looks to be more back half.
Yeah realize it.
It's probably I don't have the exact number I would probably say, it's probably close to a million and a half dollars, knowing what I know and being so close to the financial statements, but the other piece of that is not only infrastructure investment, but the timing on AR HQ and showroom.
Hires which has been that was not strategic to push out those hires but we're just making sure that when we bring our players on the team there the a players.
And our Onboarding and our interview process is very extensive and we were probably a little too.
<unk> been thinking that we can onboard as many people as we thought we were going to do at the beginning of the year. So that's probably on an SG&A and that's not necessarily a chef that's we'll call. It a phase that was not strategic that was just timing, but the infrastructure investments themselves I would probably say, they're probably close to a million and a half.
Dollars that were shifted out to the second half of the year.
That's great. Thank you and then Jack you gave some great detail on.
Your marketing Rois.
I'm wondering if you could just isolate how you're toggling back and forth between increased.
Media, maybe not media, but more online marketing spend in the face of rising tax to continue to generate traffic to the to the top end of the funnel.
In the end.
The top of the funnel I think a couple of things. One is we are continuing to get more targeting through use of media like OTT, which.
It has a higher C. P M. But it's very effective in addition, I think overall T V costs have gone up but we are just seeing brand stickiness as I mentioned it we're seeing rois. Despite increasing C. P. M is across the board go up because of we really believe is the brand stickiness and I think that indicator is the.
Word of mouth coming out of nowhere to become the leading change and an awareness year over year, which is pretty amazing and you know that that provides.
A tailwind to your efficiency at the media at the top of the funnel obviously the brand equity point that I made earlier also create efficiencies in the middle and the bottom of the funnel in terms of conversion. So we're getting.
A lot of tailwind right now that are really or.
<unk> generated by the brand just getting stronger obviously.
I can't predict how long that's going to happen, but we've certainly seen efficiencies.
Continue to bear out positive for us.
Spite, a an environment this year, so far where marketing costs are increasing.
Is that giving you insights into perhaps dialing back the quantity of spend and still receiving those same.
The level of traffic inbounds from the word of mouth component and I know you've seen it actually in your post.
In your post purchase surveys.
Well, we certainly started to look at.
We've continued to I think.
As a percentage of the business. We've continued to look at more digital and digital becomes significantly more important as we get to you know hyper local marketing for sure of that.
Helps the answer a little bit of your question.
Great.
And that's all for me, but great great job and continued success into the holiday.
Thanks Camilo.
Our next question comes from the line of Maria reps with Canaccord. Please proceed with your questions.
Great. Congrats on the very strong results and thanks for taking my questions. So just from Q2 revenue can you maybe talk about what drove it's very healthy outperformance versus your expectations and sort of you mentioned strong performance during key events, but is there anything else that was maybe different from what you.
Expected and then I have a quick follow up.
The biggest and Donna and Sean Donna will probably have much better color on the details, but overall look we had we had over performance in both the showrooms while showrooms had obviously very strong comp growth both to L y and double L y.
And they definitely exceeded our expectations the web as well did.
Because it's doubled worldwide numbers were outstanding as well at $54.0, So what I would say is our organic business.
The beat our expectations as well as business.
Sorry, our business development segment, which is the Costco and bestbuy also so really we're seeing strength across all segments. We do see a dramatic increases in strength during promotional periods and I think that's because of the growing brand strength and benign promotional environment, causing people to really.
We are engaged with us during those periods and that's that's a real opportunity for us as we go forward as we strengthen our pricing proposition as well as look to manage margins in the fourth quarter.
Got it thank you Chuck and that sort of it seems like you why didn't your customer base pretty significantly over the past several quarters can you maybe just refresh us on who your core target customer is today and how that may have changed that up now coming out of the pandemic.
Well I don't think really our core customer has changed dramatically, we're attracting a lot of new customers across the board, but that core young parents want it all.
It is critical to our business and our engagement with them are really the real indicators of.
Of future growth as well, so we're doing very well with that group our awareness is growing dramatically.
And.
The young parents want at all or the older millennials that are engaging in either looking to buy a home or expanding their family and they're right in our sweet spot and what I can tell you is among them.
Not only awareness has gone up but engagement and awareness of the brand values and alignment with our love SEC brand is a brand that represents their values. So we're very pleased with that and that continues to be our sweet spot.
Great. Thanks, so much for the color.
Our next question comes from the line of Matt Koranda with Roth. Please proceed with your question.
Hey, guys. Thanks I.
I Wonder if you could maybe just talk about quarter to date trends in the context of the.
50% growth guidance for the quarter that you provided I was labor day, just maybe qualitatively at least that'd be helpful.
Okay.
Donna do you want to hit that or.
I was on mute.
Sure I can start with that Labor day was very good I mean, you know from what I can share we had a very strong labor day weekend.
Actually stronger than what we had projected internally to happen.
We had a strong promotion that we ran I think for four days over labor day weekend and it was.
Very well received and that could be because we've pulled back on discounting.
Over the last handful of months so.
So yes people embraced our labor day weekend promotion, so very strong the year over year growth of 50% I just to remind.
Everybody any of the guidance or will say framework that we have provided in the past did not account for any of our new initiatives.
Because we were you know early on in the year. So we just needed to make sure. Some of these new initiatives we could.
Trigger them when we had planned so that being kiosks that being concierge.
And our new product launch.
Which is super exciting so any of the.
Guidance or framework that we're providing to you the updates are and the opening of additional showrooms right. So originally we were planning to open 25 and now we're at 28 so.
The additional or I will say the updates that we're providing to you in order to update your modeling now include all of the initiatives because we are pretty certain at this point in time that they will all be able to happen when we have in our plan.
Right. Okay. That's helpful.
The only I'll add and then add to that is we certainly saw in the last couple of weeks.
Continued support for the fact that we're not seeing a lot of a lot of demand elasticity to decrease promotions. So I think we have a very strong lever will continue to look at as we look to Miami manage margins in the third third quarter and on into next year.
Okay. That's helpful guys.
And then yeah I wanted to touch on gross margins, maybe in a different way here.
I guess.
I was just surprised at the year over year headwind that you're citing like more than 500 basis points in Q3 understandable on the inbound freight fronts, but it sounded like there were quite a few offsets and levers you have to pull on sort of a lower promotional and.
<unk> your existing warehouse leverage that youre getting.
Wanted to see maybe could you unpack that a little bit more in terms of the headwind that you're facing specifically.
And I'm afraid if he could.
Quantify that that'd be helpful. Just so we know what you're offsetting that with.
And I I can start so I I don't have specific numbers I can share with you other than what I did share a few minutes ago I guess on the call with an 85% increase in container costs right, who would have expected that that certainly.
We had built into our projections somewhere around 50, and maybe even a lower lower rate on increases, but we're currently at an 85% increase so as we see those freight headwinds coming toward us.
We're very flexible and nimble nimble and agile enough to be able to plan for that in our promotional discounting and the team has done a great job as you can see the gross margins that we came through in the second quarter were far ahead of where we had guided.
To or even had it in our internal plans right. So that shows you how quickly we can turn when additional information is being presented to us. So.
You know that those headwinds are really specific to the increase in container cost and then the shift.
Bringing some of our product in from China to make sure that we're.
It's not always in stock rate and again that goes back to the strong diversification that we have in our supply chain. It may cost us a little bit more to bring the inventory N.
But we have the inventory, which gives us a competitive advantage.
Yeah, and just that that's just really circles back around in my comment earlier, because we are in stock, we're seeing our price value equation to our value equation go up even in a year we've dramatically decreased.
Decreased discounts, which I think just as a note too we have pricing power to continue to manage things.
Okay makes sense, if I could sneak one more in just.
On the EBITDA Guide I guess.
I have to step up opex quite a bit sequentially to kind of get to be in line with the EBITDA guidance you gave for <unk>.
And you know an order of more than 11 million I believe sequentially in terms of raw dollars.
The data I think you cited only like about 1 million Bucks of delayed investments maybe could you guys just speak a little bit more to the split between maybe SG&A and marketing as you expect to play out in <unk>, maybe even in the fourth quarter.
And maybe just bonus accruals, maybe accounts for some of that but it'd be helpful to get a little bit more color on that one.
Ah well see you're saying operating so yeah.
The biggest adjustment and that operating margin is the gross margin adjustment.
And we probably based on what I know that's out there for consensus.
On marketing spend may be a little higher it's hard because I I don't see a lot in the marketing spend can you know what's out there broken up between marketing and SG&A I see it more as a total number.
Hey.
Marketing spend as we mentioned will be a little higher as a percent to sales in Q3.
This is probably the biggest reason for that is all the all the marketing.
Initiatives that we're putting up against our product our new product launch right. So as I remind you that the new product launch was not in.
The new product launch was not accounted for even in our.
Q a guidance that we provided or fiscal year framework on our first quarter earnings call. So that new product launch is.
It's coming in now full force in the numbers that we're providing to you and it does involve heavy investments into marketing.
If that helps.
So it's a gross amount offline.
Yeah, its everything around all of these new initiatives.
That are coming through now on the top line. They have support dollars are needed to support which are coming through now in marketing and SG&A.
Got it makes sense I'll take the rest of mine offline. Thanks, guys.
The next question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your question.
Hi, good morning.
And thank you for taking my question very nice quarter congratulations.
So my first question.
A follow up just on the supply chain, but I guess the way I want to frame. The question is.
Look at the results for the fiscal second quarter, you as a company managed extraordinarily well with a very very difficult supply chain environment. The guidance in Q3 would suggest that maybe it is.
Maybe you or at least we've been room forgot merger as well so of course is what's changed what.
What what factors out there could be more difficult for <unk> advantage in this coming quarter over the balance of year, there that we're managing that in the second quarter.
That were managed in the second quarter were not I mean again the gross margin is just on the principally the container cost.
And we do we have a I won't say a competitive advantage but.
We are able to mitigate because of our evergreen inventory we are.
It allows us to plan inventory purchases in the most cost efficient manner, but at the same time, we're not isolated from those increased container costs. So our evergreen inventory like I said it allows us to plan appropriately we're not bringing in seasonal merchandise that has to come in.
Today, So we can manage weeks of supply of inventory, we come out and its timing of inventory, we work with our overseas vendors to make sure that there they can produce to our needs. So we definitely have an advantage on that part which keeps us in stock and but again, we're not isolated from.
The increased container cost that everybody else is seeing as well, yeah, and just to add to that I think sometimes we get caught up into a sequential game, which causes us to pause.
Perhaps think there's a big trend when there isn't and what I mean by that is look we know this pandemic has had all kinds of fluctuations. We knew ahead of time, we would have headwinds in the third quarter.
But we pulled the lever in the second quarter to give us extraordinary margin gains that for the year are going to get us exactly where we want to be.
We got to be really careful over analyzing the quarter by quarter stuff, we're going to land I believe where we always thought we would and as we start to look at next year. It's the same thing we have pricing strength, yes, we have headwinds we will strategically continue to.
You know being a leader in the industry not only in growth, but I believe in gross margins.
Yeah.
Okay.
So a question I have just with regard to sales and again extraordinarily strong sales quarter. In Q2. So maybe you can just more from a new order standpoint, as you know as the economy now is pulling away from the Covid crisis.
There has been a concern out there that.
Love sack, among others companies potentially benefited through the crisis, because consumers who are more focused on this category, but your sales strength, Australia holding up if not strengthening further as the crisis are you seeing that the composition of sales of the makeup of sales change in any ways, we pulled away from the crisis.
No, it's continuing to be exactly where we want it to be on our core items, especially <unk>, where we're spending our investment in our money on getting the platform out there because obviously it will support our new initiatives in the next couple of years and build upon them. So I think we're.
Seeing it flow pretty much.
In terms of the long term plan and looking at two year trends there are about right, where we thought they would be.
Great Okay.
Okay I'll leave it there I appreciate it thank you.
The next question comes from the line of Alex Furman with Craig Hallum. Please proceed with your question.
Great. Thanks, very much for taking my question.
Wanted to ask you about how you're thinking about pricing and promotion, but it seems like you've kind of described it being less promotional a little bit as a gross margin mitigation effort, given the rising supply chain costs and yet it doesn't seem like there was really any slowdown in demand at all so how do you think about.
You know maybe the higher prices are just are just warranted given the improvements you've made to the platform over the years.
Right. That's a great question with a lot of nuances what I would say is we.
We've continued to obviously through this year understand that we can use less promotions at today's msrp's.
And continue to get demand, that's that's outstanding I think.
You know that the promotional approach is really within the year tactic as we look at it.
MSRP is obviously long term strategic I think as we're starting to get a longer track on the value the price value relationship of the brand with the customer we're going to get smarter about potentially looking at M.
And SRP changes, but I believe in the long run we will always have some sort of promotional cadence that's a soc associated with the stack more save more because internally, we really believe that.
It helps expose the benefits of the product the flexibility of the product the design for life aspects. So what I would say is as we're looking at both one is a strategic platform and one is a within the year tactical way to manage.
The dial up demand a little bit more finite so.
You can expect adjustments on both areas as we go forward.
Okay. That's really helpful. Jack Thank you.
Thank you.
Our final question is coming from the line of Vermont Williams with Stifel. Please proceed with your questions.
How are you doing thank you for taking my question.
None that we're further into the recovery could you just talk a little bit about what youre seeing in traffic in the showrooms are I know you've opened some some more showrooms off mall are you seeing any differences in the recovery in traffic there.
Oh, yes, we are seeing so we are seeing some differences that it's interesting I think we're seeing.
Much more robust returns and traffic in areas that are not.
Not as cosmopolitan and we believe it's really associated with.
The work from home movement in some of the more concentrated areas now with that said, we're seeing extremely strong growth across all segments of showrooms right now.
And and I think what we're seeing if you look at it versus on a two year basis, we are seeing.
Traffic slightly lower but with a model that's generating conversion rates of 40%, which are almost unheard of so it gets back to that touch point strategy.
We will continue to exist and evolve and we will continue to look at the most efficient way to have showrooms, which probably leads us to continue to look at obviously the off malls as well as some of the other concepts we've talked about.
Okay, all right great. Thank you.
Thank you at this time I'll turn the floor back to management for closing remarks.
Yeah, So I want to just offer a special thanks to our own team everyone who has.
Been a part of our hashtag loves that family that played played a pivotal role in generating these outstanding results.
Leading up to and ever since going public our momentum has never missed a beat and thank you. So much to our investors for supporting us as well, we won't let up have a great day.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
Yes.