Q3 2022 Lovesac Co Earnings Call
Greetings and welcome to the loves Shaq third quarter of fiscal 2022 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host Ms. Rachel Schacter of ICR. Thank you you may begin.
Thank you good morning, everyone with me on the call is Shawn Nelson Chief Executive Officer, Jack House, Chief Strategy Officer, Mary Fox, President and Chief operating Officer, and Donna Jelimo 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.
A discussion of these risks and uncertainties you should review the company's filings with the SEC, which includes today's press release.
You should not rely on our forward looking statements as predictions of future events.
All forward looking statements that we make on this call are based on assumptions and beliefs as of today and we undertake no obligation to update them, except as required by applicable law.
Our discussion today will include non-GAAP financial measures, including EBITDA and adjusted EBITDA.
These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results.
A reconciliation of the most directly comparable GAAP financial measure to such non-GAAP financial measure has been provided as supplemental financial information in our press release.
Now I'd like to turn the call over to Shawn Nelson Chief Executive Officer of the loves that company.
Thank you Rachel good morning, everyone and thank you for joining US today I will begin by reviewing the highlights of our third quarter financial and operational performance before Jack outlines our third quarter progress on our key growth initiatives Donal will wrap up our prepared remarks with a review of our financial results and a few other items related to our outlook also joining us.
On the call today is married Fox, who as you know was appointed President and Chief operating officer at loves shock on November 15th.
You mean, the same or all the Jackson before how.
As you are aware Marriott had been serving on our board of directors in February 2020, She brings a strong digital and brand building background to love Socs that stands at 25 year career in the consumer goods sector significant experience in scaling businesses and extensive supply chain and operational expertise as well.
Along with her keen impression adoption of ESG principles. She has an expansive knowledge of love sacs unique business model and all of these attributes make Mary a particularly great fit, especially given love sacs growth trajectory.
We're thrilled to have her as part of the leadership team and equally excited that Jack will be serving in the newly created role of Chief strategy officer, as well as having recently been appointed to join the board of directors.
We are very pleased with our third quarter results delivering growth of 56, 1%, while improving net income by 11% for the quarter, even in the context of making significant investments in our infrastructure. This sales growth is on top of last year's 43, 5% growth. So our continued.
And widening growth. This year is a testament to the strong demand for our product growth and brand awareness and conversion even as we are actively managing the tight supply chain environment.
We experienced growth across all sales channels, including most notably an increase in showroom sales up nearly 70% and a nearly 40% increase for internet itself. This is mark.
<unk> 14 consecutive quarters of greater than 25% growth with continued improvement overall in our ability to generate cash and profits.
One of our major competitive advantages is that we are generally totally in stock and expect to be in stock delivering nearly all orders direct to consumer and just days amidst a challenging supply chain backdrop.
Customers are continuing to recognize the strength as reflected in our Q3 results and consistently strong customer satisfaction scores throughout this tumultuous time.
This has always been something that distinguishes loves that and in this environment, where industry lead times can stretch into months. It is particularly advantageous our ability to maintain stock levels is rooted in our product design and business model.
<unk> tried more than 80% of ourselves, but more than half of those dollars are supported by just two skus seats and sides. What's more we manufacture those two skus redundant Lee with no variation in quality across diversified manufacturers three different countries, allowing us to better manage unplanned events like disruptions.
From Covid flare up etcetera.
This inventory is not seasonal and does not go bad or become irrelevant with time. So investments in this type of inventory is lower risk than most of our core products are packed and shipped in very unique ways that allow for extreme efficiency inside about shrink containers and via Fedex direct to the consumers home while we are.
Not immune to the currently elevated container and inbound freight costs are packaging and shipping solution helps to partially offset these costs and risks our growth and in stock position. It's also a testament to the incredible job our teams are doing across the organization.
Adjusted EBITDA of $5 8 million exceeded our outlook of a loss of negative three to negative $4 million as we beat our sales goals and absorbed expected freight headwinds, while simultaneously, making important people and infrastructure investments in support of our growth.
While we expect some gross margin headwinds to persist in the near term with Jack and Donna will expand on in the long term, we remain committed to a mid fifties gross margin rate as the environment normalizes and we continue to scale. The business. We have raised prices at MSRP, some already and we are discounting less counteract grew.
Margin headwinds, we will continue to move the business in this direction and believe we can continue to generate very strong gross margins relative to this category even in this challenging environment.
Operationally a key highlight of the quarter was the much anticipated launch of the sectional self check down plus charged product.
This is the first of its kind innovation with.
Which leverages new loves Shaq patents to deliver an immersive surround sound system developed in partnership with Harman Kardon and convenient wireless charging all seamlessly embedded in hidden inside the endlessly adaptable actuals platform.
It is the only home theater system that is hidden in plain sight.
From a business perspective, this launch accomplishes many goals not only does it increase our relevancy with our existing consumers and with new consumers. It also expands our competitive differentiation by creating an even deeper mode. Given there is no one else that offers this unique product initial.
Initial customer response has been extremely positive so far and with a base price of the cell tech portion of the system at about $3000 that has the potential to nearly double the average order value of transactions. It is included in on top of the typical <unk> of $3400.
Like sectional sofas, the Tam or total addressable market for home audio equipment is very large in terms of categories to compete in within the home segment.
But its home audio is a completely different category to upholstered furniture stealth tax introduction presents little to no threat of cannibalization to our current business. Furthermore, still tech AD on TV or digital is the same AD as that force actional. They are rolled into one and therefore essentially cost no more.
Sure then we were paying before to advertise sectional.
As surprising as it may sound loves Shaq intends to compete in home audio and win our system is unlike any other in many ways. We believe it is the best one available in the market today.
Turning to our ESG efforts, we are on track to publish our inaugural ESG report later this month.
This fiscal year 2021 inaugural report that aligns with the sustainability accounting standard Board's Saturday building products and furnishing sector standard sets the benchmark for love Sacs E. S. G journey supporting our commitment to achieving a 100% circular and sustainable business model, reaching targets a V.
Her waist and zero emissions by 2040.
In the coming years, we plan to focus on measuring emissions across our value chain future reporting will align with the greenhouse gas protocol corporate accounting and reporting standard which provides requirements and guidance for companies and Jack will discuss in detail our progress on other growth strategies, including our marketing and merchandising.
Strategies showroom operations, expanding other channel presence and making disciplined investments.
As we look to the final quarter of the year, we are well positioned for the upcoming holiday season, we expect the operating and supply chain environment to remain dynamic, but as described above we believe loves shaq is better suited than most in our categories to remain in stock and successful throughout.
The fourth quarter is always a heavily weighted time period for us we operate more than 120 high traffic showroom located mostly in the highest traffic malls across the United States.
We believe the sacs and now stealth tech products represent one of the coolest holiday gifts any family could hope for and post holiday is a strong month for all of home decor naturally and because of our fiscal year cut off as of the end of January.
As to our fourth quarter waiting.
Now on the other side of Black Friday, and cyber Monday, as a brand that garners, 100% of itself by direct to consumer and digital means and has immediate access to all sales and customer data. We can confidently say that we can expect continued strong growth for the quarter and we look forward to driving more market share.
Gains.
Looking ahead, we intend to just keep doing what we've done for almost four years straight now generate high sales growth, while increasing EBITDA margins on an annual basis were it not for the huge leap we made at the EBITDA line last year in the context of significantly holding back on spending during the early parts of the Covid pandemic we were.
B, increasing EBITDA and EBITDA margins this year.
But looking at fiscal year 'twenty two this year on a two year basis, we expect the trajectory of increasing profitability. We also expect to continue to manage this business in a way that will allow us to stay on the course to lift and your EBITDA margin through next year. Despite pressures at the gross margin line.
In the near term due to macro forces we.
We believe this will allow us to emerge some day as a dominant player in our categories.
And become the most beloved brand in the home category, which is our stated mission and maximize value to our shareholders over the long run.
With that I will hand, it over to Jack to cover our strategic priorities and progress Jack.
Thank you Sean and good morning, everyone. As we look to the next chapter of growth and the many opportunities that lie ahead, low staff will need talent systems and infrastructure to scale in a manner that drives value for all of our stakeholders and I'm very excited to take on the new role of Chief strategy Officer and board member in pursuit of this goal.
I've had the benefit of getting to know Mary well since she joined our board and I've witnessed firsthand the valuable contributions.
Delighted to partner with her on her position as president and CEO.
Now turning to our third quarter performance, we're very pleased with our third quarter results and the strides we've made against our growth strategies, which was which I will now review.
Starting with one product innovation of which the key highlight was our stealth tech launch on October 18. It is.
And it's early days, but the customer reception to this new product launch has been strong and we're seeing associated increases in fractional transaction of ltvs that bode well for customer engagement loyalty and repeat purchases.
Efficient and marketing merchandising strategies, we continue to generate attractive marketing rois in our marketing efforts continue to help raise overall awareness and deliver the 58% revenue growth year to date that we have experienced some stealth tech highlights.
In the third quarter with the launch itself back at the end of the quarter, we introduced new and social assets with early indications looking very promising including a 13% year over year increase in web sessions, driven mainly by paid search.
Broadcast syndication has been rolled out for holiday after successful local testing during memorial day, and Labor day and resulted in an increase in overall TV reach by 25%. Additionally, as part of the self check product launch Love Sac has partnered with Amazon videos newest series will upon which launched.
In the third quarter and had great success in terms of social and digital marketing.
C. P. M continues to increase on core channels, but this was largely offset by higher conversion rate. Despite continued increases in CPM across our digital media channels are established digital strategies and new initiatives like SMS marketing hyper local advertising and consideration advertising are driving strong engagement.
Bergen and revenue performance overall media ROI continues to perform above our benchmarks and while we expect overall media to continue to see cost pressures, especially in the fourth quarter due to holiday retail closures, we anticipate offsetting this by higher conversions.
Three touch point operations, we're continuing to see synergies across our various touch points, where customers can experience. The product you don't have good it is and make the final decisions are showrooms continue to be an important part of our omnichannel touch points strategy and continue to deliver strong results as reflected in our Q3.
Comps of plus 53% or 79% two year comps, we opened nine new showrooms in Q3 and remain on track to open 28 for this fiscal year with added capabilities like the Omnipod scheduling specialists, we continue to enhance the showroom shopping experience throughout the third quarter to postpone.
Specialist team continued to expand their reach across like physical touch points and ecommerce in Q3 post purchase specialist communicated with over 92% of loves that Cosmos. He spoke to system met the pre deployment dollar threshold for their service, we're continuing to see a lift in close approaches sees that scores cosmos engage.
What they post purchase specialists versus those who did not.
We continue to rollout our sales and service strategy throughout Q3 and will be present in all touch points in Q4. This rollout leverages talent across trade areas to support customers in the shopping journey, both pre and post purchase with a goal of enhancing the customer experience and further increasing customer satisfaction.
We are continuing to expand our real estate strategy with the launch of two mobile concierge vehicles. In Q3. These vehicles serve as additional asset light touch points in key markets preliminary results are exceeding conversion and it'll be expectations and we are evaluating the launch of additional vehicles next year. In addition.
We opened one kiosk in Q3 and are on track to open up to eight branded kiosk by the end of Q4 markets with many without a showroom presence.
Spell check that's been incorporated into the showroom kiosk and mobile concierge experience and will be rolling out to the balance of our bestbuy shop in shops in Q4.
While we have returned to normal operating procedures, we continue to monitor the pandemic situation carefully following local and state guidelines and prioritizing the health and safety of both our customers and team members.
And number four expanding our other channel problems, we're very pleased with the strength of the Costco business, which we're hosting our online roadshows directly with Costco com and we've seen productivity increases year over year, driven by an expanding premium poverty and love salt offering.
We continue to be excited about the partnership with best buy as we have seen a bestbuy dotcom business increased at a strong rate this year, which we attribute to performance through our customer experience at best buy dot com as well as some marketing tests that we ran in addition, we opened one best five shop in shop in the third quarter.
We will continue to pursue opportunities with other partners as their other channel presence continues to be an effective way of expanding our brand awareness and reach.
By making disciplined infrastructure investments starting with E. Commerce, we continued to make key investments to enhance our e-commerce re platform during the quarter.
Inversion rate continue to be a highlight for us in keep rate with an improvement of 58% versus Earl Y driven by 74% increase in mobile conversions integrating stuff back into E. Commerce shopping experience was a major accomplishment during the quarter.
We have made stealth tax selection process doing online shopping experience optimize and easy for new and existing customers based on actual size and configuration. We have also upgraded the latest version of magenta to platform, which includes significant security updates heading into this holiday season in.
In September we successfully launched a new customer data platform or CDP. This platform unifies and enhances our customer and shopper data, giving us the ability to expand our usage of first party data for digital marketing and provide the intelligence needed to personalize the omnichannel customer experience even further.
Regarding supply chain updates.
Our strategic investments and forward inventory placement product flow optimization and supply chain redundancy allowed us to maintain a differentiated position and in stock and order fulfillment, which helped drive our Q3 results with you.
The all important holiday season, our inventory is well positioned heading into our busiest time of the year as.
As we look ahead.
We expect the same supply chain headwinds to persist throughout fiscal 2023 over the near term we continue to mitigate through several tactics and are responding over the longer term with key initiatives to reinforce our sourcing base supply chain channels.
Investments.
So in summary, we're pleased with our third quarter financial performance and the progress made against our strategic growth initiatives. Our strong Q3 results reflect the exceptional execution by the entire loves that team as we continue to navigate a dynamic operating environment we.
We feel good about the underlying momentum and trajectory of the business for the holiday season, and look forward to closing out the year strong.
Before Donna reviews, our Q3 results I wanted to turn the call over to Murray, President and Chief operating officer for a few brief introductory remarks Mary.
Thank you Jack I'm delighted to be part of the loves that leadership team with Sean Jack and Donna and as you can all imagine it's been a busy and productive months since I joined on November the 15th but it's getting to know the business even the sad that in addition to meeting all of the key.
From my time on the board throughout my career and as I loved that customer for the past 11 years I have gained great respect and admiration for love sacs differentiated direct to consumer business model unique product loyal customer base and deep commitment to sustainability.
Clothing at circle to consume a philosophy.
I'm very honored to take on this new role and will leverage my extensive experience working with consumer goods companies throughout my career to help execute the company's growth strategy and drive long term value.
With that I will hand, the call over to Donna to review, our third quarter financial results.
Donna.
Thank you Mary Good morning, everyone. I will begin my remarks with a review of our third 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 $42 million or 56, 1% to $116 $7 million in the third quarter of fiscal 2022 as compared to $74 $7 million in the prior year period.
The year over year net sales increase was driven by growth across all channels with overall comparable sales increasing 47, 1% due to the success of our Labor day campaign 28 year on year increase in ending showroom count and higher productivity of our temporary online pop up shops on Costco Dot com.
Tom.
Schumer them net sales increased $28 2 million or 67, 8% to $69 $7 million in the third quarter of fiscal 2022 as compared to $41 $5 million in the prior year period.
This increase was due primarily to a $19 $5 million increase in comparable showroom point of sales transactions, just $56 1 million in the third quarter of fiscal 2022 as compared to $36 6 million in the prior year period.
As a reminder point of sales transactions represent orders placed through our showrooms, which does not always reflect the point of which control transfers to the customer and when net sales are recorded.
In addition, we opened 28 additional loves sacs showrooms, including two mobile concierge and one kiosk since the third quarter of last year, which was a meaningful driver of non comp showroom sales increase.
Internet net sales sales made directly to customers through our ecommerce channel increased $9 $8 million or 32% to $35 $5 million in the third quarter of fiscal 2022, as compared to $25 $7 million in the prior year period, principally driven.
By the performance of our Labor day campaign this fiscal year.
Other net sales, which principally includes pop up shop and shop in shop, net sales increased $3 $9 million or 52, 7% to $11 $9 million in the third quarter of fiscal 2022 as compared to $7 $5 million in the prior year period with the increase primarily related to higher.
Productivity of our temporary online pop up shops in Costco Dot com.
By product category, our sectional net sales increased 58, 6% shock next sales increased 39, 2% and our other category net sales, which includes decorative pillows blankets and other accessories increased 69, 8% over the prior year quarter.
The decrease in gross margin percentage of 510 basis points over the prior year period was primarily driven by an increase of approximately 748 basis points and total distribution and related tariffs expenses, partially offset by an improvement of 238.
This points in product margin.
The increase in total distribution and related terrorist expenses over prior year was principally related to the negative impact of 953 basis points increase in inbound transportation costs and increased tariff related to higher product sourcing from China, partially offset by 205 basis point improvement.
<unk> due to higher leveraging of warehousing and outbound freight costs.
The product margin rate improvement was due to lower promotional discounting and continuing vendor negotiations to assist with the mitigation of tariffs.
We exceeded the third quarter net sales guidance, we shared with you on our last call primarily driven by the success of our Labor day campaign and higher shipment volumes due to higher warehousing throughput.
Our gross margin percent in the third quarter of fiscal 2022 was in line with our guidance, which contemplated continued supply chain headwinds that are driving higher inbound transportation costs.
We were able to partially mitigate these higher costs through continued reductions in promotional discounting selective price increases and better leveraging of our warehousing and distribution costs.
Yeah.
The 46, 8% year over year increase in SG&A was driven largely by higher employment costs doing an increase in new hires and variable compensation.
We also had higher rent expense from the additional 28 showrooms and higher percentage rent from the increase in net sales.
Overhead expenses increased due to infrastructure investments travel expenses and equity based compensation.
<unk> related expenses also increased primarily due to credit card fees related to the increase in net sales.
SG&A expense as a percent of net sales decreased by 207 basis points due to higher leverage within infrastructure investments equity based compensation insurance rent and selling related expenses, partially offset by a deleverage in employment costs and travel.
The deleverage in certain expenses was related to the investments we are making into the business that were put on hold in the prior year related to COVID-19 financial resilience measures.
SG&A expense was lower than our expectations in the third quarter, principally related to lower employment costs due to delays in hiring planned in person company meeting shifting to virtual events.
Shifting some of our infrastructure investments into the fourth quarter of the fiscal year. This favorability versus our expectations was partially offset by higher rent expense and higher credit card fees due to the increased net sales.
Advertising and marketing expenses increased $4.8 million or <unk> 44, 3% to $15.8 million in the third quarter of fiscal 2022 as compared to $11 million in the prior year period, resulting from continued investments in marketing expense to support our sales growth.
Advertising and marketing expenses were 13, 6% of net sales in the third quarter of fiscal 2022 as compared to 14, 7% of net sales in the prior year period.
The 111 basis point decrease was due to improved performance and media activities driving higher sales volume at lower promotional discounting.
Depreciation and amortization expense decreased approximately $200000 from the prior year period to $1 $7 million.
Generally due to the accelerated depreciation expense in the prior year period, partially offset by current year capital investments for new and remodeled showrooms.
In the third quarter of fiscal 2022 operating income was $3 million as compared to an operating income of $2 $5 million in the third quarter of last year driven by the factors just discussed.
Net interest expense for the third quarter was approximately $45000 principally relating to unused line fees on our revolving line of credit.
Tax expense in the third quarter of fiscal 2022 was $174000 as compared to $11000 in the prior year period with the increase 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 $2 $8 million or <unk> 17 cents per diluted share in the third quarter of fiscal 2022 compared to net income of $2 $5 million or 16 cents per diluted share in the prior year period.
We generated adjusted EBITDA of $5 $8 million in the third quarter of fiscal 2022 as compared to adjusted EBITDA of $6 million in the prior year period.
Turning to our balance sheet, our liquidity continues to remain strong as we ended the third quarter with $47.9 million in cash and cash equivalents and $22.5 million in availability on our revolving line of credit.
Please refer to our earnings press release for other details on our third quarter fiscal 2022 financial performance.
Turning to our outlook.
We expect to close out another year of strong sales growth with 28, new luxury showrooms the opening of the kiosk and the introduction of two mobile country areas.
We've been restoring expenses that were pulled back in fiscal 2021 due to the pandemic and strategically making infrastructure investments to support the substantial multi year growth opportunity that lies ahead.
We're all fourth quarter, we expect sales growth of approximately 35% with adjusted EBIT of dollars in a $12 million to $13 million range compared to positive adjusted EBITDA of $25 $9 million in the same quarter last year.
Adjusted EBITDA is being impacted by expected lower gross margins of approximately 1000 basis points year over year due to significant supply chain headwinds, most notably current inbound freight rate inflation versus the prior year.
As we look to fiscal 'twenty 'twenty three we remain confident in the trajectory of the business. While we are not providing formal guidance for fiscal 2023 at this time at a high level, we expect healthy net sales growth in the high 20% range and adjusted EBITDA growth.
To exceed net sales growth.
This is despite an expectation that supply chain headwinds persist throughout fiscal 2023.
As a result of our continued supply chain headwind mitigation efforts full year gross margins are expected to be around 50%.
In terms of Capex spend we continue to expect to end fiscal 2022, and a healthy cash and cash equivalent position and now expect capex to be in the $16 million to $17 million range versus the prior $17 million to $18 million range shared this includes capex.
Spend for our new showrooms kiosks, and mobile concierge openings that we shared earlier.
So in conclusion, we are pleased with our Q3 results that exceeded our expectation from a net sales and profitability perspective.
We are so proud of the excellent execution by the entire <unk> team for remaining agile and nimble and missed a dynamic backdrop.
We are confident in our positioning for the fourth quarter and look forward to building on our success to date as we finish the year.
With that we will.
Now like to turn the call back to the operator, who can open it up for questions operator.
Thank you at this time well be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Information tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
In the interest of time, we ask that you each keep to one question and one follow up thank you.
Our first question comes from the line of Brian Nagel with Oppenheimer and company. Please proceed with your question.
Hi, good morning.
Nice quarter.
Mary and Jack Congratulations.
On your new appointments.
Yeah.
Thank you Brian.
Question I have I'm, just with regard to.
The outlook and specifically gross margins so you telegraphed to.
For Q4, and about 1000 basis point reduction in gross margin so.
And you just you talked a lot about the factories you can continue with that would represent.
I guess it would be suggestive of more headwinds than we saw in <unk> in the third quarter. So the question I have can you kind of articulate what that is and.
Where we are right now in the quarter, where you were where passenger well we're into the holiday season or is that is that thousand basis point degradation, what youre seeing at this moment.
Yeah.
Hey, Brian It's Donna and good morning, Yeah, so that that thousand basis points. If you remember we take pretty heavy stock our inventory positions as Sean had mentioned earlier I'm on the call right. Our inventory is evergreen so.
It's just the timing of the cycling through the inventory that has the heart the higher freight rates on it what's coming through in the fourth quarter of this year is fully burdened by those higher freight rates. So I think I had mentioned on the second quarter earnings call you know our inbound container.
Costs.
Were this time last year 5000, we're paying upwards to $26000 a container at this point in time, and so what we see coming through or coming through the financials in the fourth quarter, it's fully burdened by those cost, but the point of that is when we gave the not formal.
Guidance for fiscal 2023 were conservatively estimating that we will be impacted by those higher freight rates all throughout next year, which if they do turn around at any point in the in the year that will be beneficial to us So oh.
Again fourth quarter, we feel is fully burdened and then going into fiscal 'twenty twenty-three again very conservative approach that we're taking that we we don't we.
We don't see any positive impact, but we're hoping it happens going into next year, So hopefully that helps.
No. That's very helpful. And then if a follow up just on the supply chain. So we understand the dynamics. So should we think about the supply chain disruptions.
I know that you and a lot of other companies are discussing but it ended up getting their love sack P&L is the impact isolated.
Isolated to cost of sales, you're you're not seeing it in any type of impact on sales.
Yeah, I'll start that and then John you can add at this point, we earned an excellent because of the redundancy that Sean mentioned upfront across the same product really our sectional platform we.
We're in a fantastic place in terms.
Of inventory to carry out our sales projections for the rest of this year as well as a view we haven't to next year and we feel very good about that it certainly hasn't been without a lot of.
Actions by the team, but I think you know our belief in this during this type of period of time, where theres. So many questionable dynamics that this is truly a strength of the business, we're going to lean into as we continue to disrupt the market and gain share.
Great.
Well I'll turn I'll turn the call to someone else. Thank you very much I appreciate it.
Thank you. Our next question comes from the line of Victorian James with D. A Davidson. Please proceed with your question.
Good morning, Thank you for taking my call.
So my question then is we've noticed stewardship ads promoting your sectional with immersive sound can you talk to us a little bit about your near term marketing spending plans, including T V to promote your new effort and then sort of in addition to that how is your ads for your new immersive sound product also paused.
<unk> impacted your sectional sales for consumers buying them without that immersive sound.
Yeah. Thank you we at this point if you look at our overall spend I'll say on an annual basis.
Between 13, and 14% of net sales.
So that's it.
That's where we'll head I think in terms of Selkirk, what really has done for us. It provides another really unique selling proposition for the whole line. So we're seeing the ads to be effective at not only lifting up the.
<unk> sales, which were seeing a very nice attachment rate, but we're also seeing very high Rois and continued excellent run rates in terms of of the core business as well so we're continuing to evaluate it.
As you probably know we always do we're constantly doing tests, and then learning and so more to come as we get more experience about the dynamic between the stope Tech.
Advertising are included in the brand advertising, but right now they are really synergistic and there are no lifting the overall business quite well.
Thank you.
Yeah.
Thank you. Our next question comes from the line of Camilo Lyon with P. T. I D. Please proceed with your question.
Thank you good morning, everyone.
I wanted to get back to the gross margin discussion if we could it seems that in the third quarter, you experienced incremental margin pressure.
Some more goods coming from China.
Is this a result and in there was hoping tariffs they're still in place is that the result of supply disruptions from Vietnam.
And if so when do you expect a rebound in production such that tariff pressures from China will lessen as you shift some of that production out of mainland.
Sorry about that can be allowed to sell.
The degree that is truly shifted production around to our various manufacturers.
The manufacturer sectional, Malaysia, China, Vietnam based on Covid flare ups based on container availability all these sorts of things.
And next year without a doubt there'll be fewer good fewer sectional is manufactured in China than in the year that we are currently consuming them. So tariff pressures. It's one of those puts and takes.
That will change the dynamic of gross margins for us throughout the course of next year and it is part of the reason that while we're experiencing is gonna put it fully burdened gross margin pressure in Q4.
There are a number of things moving within the business on the front end in terms of discounts pricing all sorts of things that affect our gross margins and on the back end like what you mentioned that give us.
Optimism in terms of what we can expect.
For gross margins overall next year, and so I think Q4.
<unk> is unique in that way.
Okay got it so it seems like Q4 margins I'm really shouldn't be kind of the the nadir for sure over the next two next year really start to.
It is set to rebound, especially particularly in the back half. If there is any sort of relief on container shortages in overall freight cost that is that a fair way to think about that even though it doesn't look like you're guiding to that yeah.
Yeah, we won't we won't commit quarter to quarter, how things will move yet you know it's obviously.
Early looking forward toward next year without Q4 being without being through Q4, yet but from.
From a logical standpoint, that's correct and we.
We believe that our their numbers there are a number of things that we can do in the business to mitigate some of this gross margin pressure as next year evolves throughout the year.
Great.
Oh, sorry go ahead, Jack Yes, just to add to that really did you see the fully burdened fourth quarter, we knowingly made decisions to that.
Rand, that's disrupting and everybody knows.
Our expectations in the long term to grow.
That being in stock is critical of or anything else as long as we can continue to maintain margins that are as strong as they have been on an annual basis over 50% because of its attracting customers. We're gaining VSAT dramatically our service levels are better than the competition. So this is really a.
A fertile environment, while the headwinds are there on freight cost.
We are not burdened by the supply chain issues that many others are having and we're really leveraging that and will continue over the next year because we do believe obviously after after after the year. So we will start to see a normalization and won't be in an excellent position.
Radically greater shares.
That's the way we're looking at that.
Yeah.
That's great and then just my follow up on pricing.
You mentioned that you were taking you've already taken selective price increases can.
Can you state what those have been.
And just selected become broad based price.
Price increases next year and if so what are you seeing from a consumer response, if any to those price increases.
We really okay. So we've taken price increases on our core seats and sides.
And we have an opportunity to also look at price increases on a lot of our cover business, but we want to be really careful I think the way. We're looking at it there are obviously costs that are going to be long term and there are some.
Long term inflationary costs, but there are also a lot of transient costs and what we don't want to do is manage our MSRP around what we think are the more volatile factors. So we did take the one one MSRP change I think the other aspect we have a lot of opportunities to continue managing margin.
Through promotion and mixed management, which the team has done an amazing job on it and I would tell you that I think.
We have a lot of levers to continue to pull as we get through the year, but we don't want to do is be sort of a two.
Two opportunistic in a in a very soft market in terms of supply in terms of MSRP, because we don't want to be moving our MSRP around so we're really looking to manage the next year through more tactical changes as we evaluate the price proposition and looked at the long term price will be based on where we think.
It adds the most value to the brand and the most stickiness. So so we're managing from both and it's a very strategic point of view as well as tactical I think youll see more changes in the next six months in terms of.
Ways of looking at promotions et cetera, because what we are getting our tremendous levels of Ara wise out of a rabbit advertising out of the awareness out of the word of mouth. So.
The good news is I think we have some tailwind that can help us manage some of these in terms of the brand stickiness that we're experiencing.
Fantastic all the best for the balance of the year guys.
<unk>.
Thank you.
Thank you. Our next question comes from the line of Maria ramps with Canaccord Genuity. Please proceed with your question.
Great. Thanks for taking my questions and congrats with continued strength in the business I just wanted to follow up on the self check lunch sort of recognizing that it's still pretty early can you maybe talk about how customers are engaging with the product to what extent it is attracting new buyers, Washington shrink sort of reengage in existing buyers and are is there anything you can share.
What's sort of the portion of product that is purchased by your existing customers. At this point and then I have a quick follow up.
That's a lot. So I would say the first thing I'll say is I don't have a lot more information for you or we will as a team have a lot more information for you at the at the fourth quarter call because really just just to put it in perspective, we launched <unk> at the end of the third quarter, we had demand in the third quarter, but we really haven't had actual.
Net sales until the fourth quarter, but with that said we are seeing some some tremendous things I can tell you just qualitatively from the field staff Tech introduction has raised the level of engagement between the associate and the customers two amazing levels, and that's where I think as I mentioned earlier, the Dell Tech advertising.
It's sort of a whale is a microcosm of what's happening in the field. It's lifting the interest in the brand it's adding another very unique seller selling proposition to a brand that already has many and causing a lot of engagement in the showrooms and I think that's why we're able to not only look at the sales of a product.
Product without snow pack, but don't check out of a pretty high attachment rate, we've seen the attachment rate as high as 15%.
We've seen it from both new and repeat customers.
A lot of dynamics happening right now so what I would say is.
You know and we've done modeling as well, it's going to attract new customers. We know that based on that total market. That's addressable that's the audio market.
We also are seeing a lot of attraction by current customers and interest in current customers and adding it to.
Two to their current set up and that's really enhancing the DFL philosophy and the support which we know are most loyal customers are really trigger into that idea of a flexibility. So.
A lot more to come and I think I'll be able to give you a more fulsome.
<unk>.
Outlook after the quarter, but we are seeing initially also vs that are pretty high rent related to the skull tech purchases. So we're seeing about a 200 dollar increase in <unk>.
The <unk> win deltak is involved in that.
Lately Incrementals. So we certainly are seeing some incrementally at the outset and.
We look forward to sharing even more with you in the next quarter.
Thank you that's helpful and just going back to your preliminary outlook for next year. So youre guiding to EBITDA margin expansion. Despite sort of continued gross margin compression can you maybe just talk about where you see operating leverage coming from I guess, what should drive that.
Yeah.
Good morning, Maria Yeah. So there's a couple of things normal SG&A, we're going to see some leverage in.
Maybe not around payroll as we continue to build out the teams needed to support the healthy growth.
But in normal.
Salting insurance professional.
Professional fees were projecting leverage in those areas and also some slight leverage.
In marketing and the Rois on marketing continued to increase so yeah, that's where it's that's where it's coming through.
Got it thanks, so much Brent yeah things like rent.
Some other items in the SG&A categories.
Got it thank you.
Yeah.
Thank you. Our next question comes from the line of Matt Koranda with Roth Capital Partners. Please proceed with your question.
Okay.
Go ahead excuse me Hey, guys. Thank you for taking the questions.
Just spending back to the gross margin.
<unk> just wanted to see if you could clarify for us how much of the inventory currently.
That you have on hand was brought in during the peak of the inbound afraid crunches. So if you look at inbound freight probably you know at.
At least ocean shipping kind of peaked in that July August timeframe. So I would assume most of your inventory at this time is sort of fully as fully laden with those costs, but maybe you could speak to sort of how much inventory.
So it's been brought on since that time.
Yeah, Matt you're right, it's it's probably close to 100% of the inventory that we're bringing in from overseas. How does does higher freight rates on it and.
That's why we're saying that the inventory that we're selling through in the fourth quarter, and then going into <unk> at least at the beginning of next year well have those higher freight rates related to that inventory as it passes through the P&L.
And then mitigation action on it I mean, you mentioned a number of levers that you have at hand, but obviously theres also promotional environment to contend with kind of the holiday.
And into early next year, just wondering if you could speak to sort of some of the more specific levers that you have to counteract some of the pressure in the next quarter or two.
Yeah, I mean, clearly we didn't want to put a number around it but the first thing is certainly promotional levers not being seen right now is.
While we're in this environment, where there is a general malaise in terms of supply in the marketplace that gives us a real opportunity since we are in stock to sell at a higher at a higher level, a higher value of selling with less discounts and we do see opportunities continuing through next.
Year to make adjustments.
And not only in got it. Thank you and just to be clear adjustments in terms of decreasing the frequency and the level of discounts and on top of that the team has really done an excellent job in managing mix and as we manage our mix to a more premium covers or more pre.
In search we get higher margins as well so there's a number of places we're really attacking it from a selling perspective, and then obviously as Don mentioned.
We're being conservative while we expect a heavier cost to be the ones, we're bearing right now.
Okay. It makes sense and if I could just clarify that.
If we think about sort of how quickly you can sell through inventory that was sort of at the peak a portion of the inbound freight pressure I'm. Just wondering if you could kind of speak to.
Inventory turns expectations heading into next year in terms of kind of turning that peak cost inventory versus sort of when we start lapping that that's coming down the back end of the sort of the lower freight cost sequentially that we've seen them.
And to the end of the year here.
Sure.
Yeah.
Yeah.
Do you want to handle that one.
I'm, sorry, what was that amount.
Yeah, I wanted to get a sense for just.
How we should think about inventory turns I guess embedded in that first question I was trying to figure out just sort of when we think about sort of peaking gross margin pressure does it peak in the fourth quarter, just based on sort of I guess the rough math. So you can do here.
We can assume that most of the inventory you are going to turn through.
Sort of was was fully burdened with that peak inbound ocean freight cost a backend kind of July August.
So wanted to know if you could speak to sort of inventory turns and how quickly you can sell through that higher cost inventory that you have on them.
Yeah. So we probably I mean, we sell through our inventory turn our inventory probably four times a year on a safe side right, but we don't we don't look to drive inventory turns that's not what we think to do with the business, we bring inventory in to make sure that we can remain in stock. So some.
Quarters are maybe a little longer than that time period, some might be a little sputter right.
I think the thing to just focus on or one of the things to focus on is when we gave.
A piece of outlook for next year, we were pretty conservative in saying that.
If next year is fully burdened by these freight headwinds, which we're all hoping that the.
They eventually go away and that they're not here through the whole year that we still will be able to drive margins of 50% at least 50% right with all the other mitigation efforts that we're taking so you know very conservative approach we're looking at.
Our goal here is to make sure that we maintain our inventory positions we're in stock.
You know, we can fulfill our customers orders and will mitigate and if if throughout the P&L. So we'll leverage where we can and SG&A. So that's why you see that the adjusted EBITDA margin is growing.
Growing at a greater rate of sales. So I think all really positive things given the headwinds that.
We're all facing related to inbound container cost.
Yeah.
Got it very helpful. Thank you guys.
Thank you. Our next question comes from line of Alex Fuhrman with Craig Hallum Capital Group. Please proceed with your question.
Great. Thanks, very much for taking my question and congratulations on another really strong quarter wanted to ask about what you've been doing with with ticket pricing and obviously, we've seen just from your promotions around key holidays like labor day, and Thanksgiving, you've been discounting a lot less than you.
In prior years.
There is anywhere or have you started to see any resistance to these higher prices are there any particular product categories or times of year or channels, where youre seeing any resistance and now on the flip side are there are there any categories, where maybe you think prices remain too.
Low and there's and there's opportunity to continue to be a little bit more aggressive there.
Yeah, that's a great question, Alex and that really goes back to sort of this idea of where we are in terms of inventory relative to the rest of the world and then how we think about what's going to happen in the next year. So our assumption is in the next year a lot of the marketplace will probably be in a better position of inventory.
And while our internal data and certainly our sees that and our evaluation by our customers of our about you have remained very strong it's not at the strongest levels ever be want to be very careful to separate that value based on that.
But one company that's available to ship in two to three weeks versus everybody else at that goes the way we wanted to make sure in a competitive environment, we still have a very good.
<unk> value to the customer that is based on thinking that they can understand so I think in the short run what the what does that mean less frequent and less deeper types of flash sales, we still like the idea of having the events because they rally us around.
Obviously, our advertising as well as isn't really something that customers and the industry understand but in terms of frequency and depth of discounts. They will continue to probably go down in the near future I would expect and we're really seeing no resistance in the short run of course in sales to the price increases, but we are.
Got to be really really careful I think strategically because the game for us is the five year game.
Yeah.
Great that's really helpful. Thank Jack.
Thank you ladies and gentlemen, our final question today comes from the line of Blue Mountain Williams with Stifel. Please proceed with your question.
Alright. Thank you thanks for taking my.
Question.
Just youre opening up 20 showrooms. This year do you have a range. We can think about for next year as well as our kiosk and.
Mobile continued.
Yeah look there.
The touch points as we've continued to discuss are incredibly important to us and we will continue to expand our touch points overall at a rate consistent with.
What you've seen in terms of the mix between showrooms and concierge and shop in shops were still developing are you know we're still analyzing the business and I think we will have a more clear view of next year, but I would certainly expect the touch point growth and total touch points to be approximately.
The same as it was this year and we'll give you more detail after the at the fourth quarter.
Gotcha.
Okay, great. Thank you.
Yeah.
Thank you ladies and gentlemen, this concludes our question and answer session I'll turn the floor back to Mr. Nelson for any final comments.
Yes.
Thank you to our associates, who have made these results happen very proud of our team.
Really proud of the business and the results that we've been able to generate thanks. Thank you to our investors who continue to stand with us and help US grow. This company, we look forward to a fantastic Q4, and an even brighter next year. Thank.
Thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.