Q4 2022 Lovesac Co Earnings Call
Greetings and welcome to the Love Sac fourth quarter fiscal year 2022 earnings conference call. At this time, all participants are in a listen only mode.
Brief 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.
It's now my pleasure to turn.
It is now my pleasure to introduce your host Rachel Schacter of ICR. Thank you Rachel you may begin.
Thank you good morning, everyone with me on the call is Shawn Nelson Chief Executive Officer, Mary Fox, President and Chief operating Officer, and Don and John <unk>, Chief Financial Officer.
Before we get started I would like to remind you that some of the information discussed will include forward looking statements regarding future events and our future financial performance.
These include statements about our future expectations financial projections, and our plans and prospects.
Actual results may differ materially from those set forth in such statements.
For a discussion of these risks and uncertainties you should review the company's filings with the SEC, which includes today's press release.
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 included EBITDA and adjusted EBITDA. These non-GAAP measures should be considered in addition to U S.
Not as a substitute for or in like 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 lots that company.
Thank you Rachel good morning, everyone and thank you for joining us today.
I'll start by reviewing the highlights of our fourth quarter and fiscal 2022 financial and operational performance then marry Fox, our president and COO will outline our key growth initiatives for 2023, and finally, Donna <unk>, our CFO will review, our financial results and a few other items related to our <unk>.
Look in more detail.
Before turning to our results, let me first say that our heart goes out to all those affected by the war in Ukraine, Our ultimate guiding principle at loves Shaq is of course love and it breaks our hearts to see the human tragedy, while we have no business operations in Ukraine region, We know our service men and women are certainly on alert and our thought.
Odds are with them and their families.
As for our fiscal 2022 performance fiscal 2022 was another record year for loves Shaq with business continuing to perform extremely well, despite the challenging and volatile backdrop.
Our strong financial and operational results for the year are reflective of our unique competitive advantages across our people brand business model and the operating platform for the year. We delivered a total annual net sales increase of 55, 3% total comp sales growth of 46, 9% and <unk>.
Adjusted EBITDA of $55 million and 96, 1% increase this incredible growth is stacked on a four year CAGR of 48, 7% growth.
And comps versus prior year comps of 53%.
So this is not just a prior year COVID-19 down period easy beat.
We achieved many operational accomplishments in fiscal 'twenty to Kim.
Key among these were we opened 28 loves shaq branded showrooms to mobile concierge trucks, and eight kiosks 18, new best buy shop in shops, which we operate directly for a total of 21, we now operate a total of 167 physical touch points that help our customers on their digital journey, we believe we best represent.
A successful digital model should look like.
We launched the much anticipated sectional skull tech sound plus charged product in partnership with Harman Kardon, which is a first of its kind innovation leveraging new loves shaq technology patents to deliver an immersive surround sound system and convenient wireless charging completely out of sight in the living room.
We maintained in stock levels throughout the year shipping the vast majority of orders to customers and just days, despite the challenging supply chain environment.
This is enabled by our unique product design and business model, including redundant manufacturing of key sectional skus in four different countries, allowing us to better manage unplanned supply chain challenges, we continued to grow our customer file and drive loyalty with existing customers showing new customer growth of 14.
3%.
We saw a lift in our fee sat scores that's customer satisfaction as customers are appreciating more than ever our best in class service levels and in stock positioning while others in the industry are reporting long delays given supply chain challenges.
We made critical investments in people and infrastructure in support of our growth, including our E. Commerce platform that will allow us to continue to scale rapidly without sacrificing the customer experience. We remain focused on our ESG efforts with the publication of our inaugural ESG report in December that sets the benchmark for Love Sox ongoing ESG journey.
Supporting our commitment to achieving a 100% circular and sustainable business model, reaching target zero waste and zero emissions by 2040.
Last year, we diverted more than 50 million plastic bottles from the waste stream upcycling them into home decor fabric more than any other firm. We're aware of since we transitioned to manufacturing all of our grab history fabric for sectional two 100% recycled plastic bottles, we estimate to have diverted well over 100 million bottles from the waste stream overall.
And counting.
Yeah.
Now let me discuss the key highlights of our fourth quarter performance. We are very pleased with our fourth quarter performance that well exceeded expectations with broad based strength across channels as we continue to drive market share gains.
For the quarter, we delivered top line results of 51, 3% to $196 2 million on top of last year's 47% growth with total comparable sales growth of 50% and internet growth of 22, 8%.
This marks 15 consecutive quarters of greater than 25% growth netting.
Net income increased by 54% to $32.6 million and we reported an increase in adjusted EBITDA of 23, 6% to $32 million for the quarter.
As we've said before excluding shorter term supply chain disruptions gross margins and adjusted EBITDA for the company would be tracking at historical highs, we remain confident in our ability to deliver gross margins in the mid Fifty's range. Once some of these disruptions abate it.
Meantime, we have taken price increases on our core seats and sides and could also look at price increases on a lot of our cover business as well, but we want to be really careful because in this environment, we'd love sack is gaining significant market share.
While surprising and delighting customers with our speed to delivery in stock levels. Throughout these uncertain times importantly, we are seeing no resistance. So in the short run we are being very strategic.
In regards to managing margin beyond price increases, we have multiple levers still available to us.
We will continue to adjust promotion mix and merchandising both online and in showrooms, which the team has done really well as evidenced by our beat to expectations in this well.
Now turning to our outlook for fiscal 'twenty three.
Demand is strong and we feel confident about our momentum in the coming year.
We do expect and have planned for supply chain headwinds to persist through FY 'twenty three to that end, we will leverage our tremendous growth as we work with our manufacturing partners to mostly stent inflation at the raw goods and labor input levels, and we will use our pricing power judiciously, we expect to be able to largely mitigate these pressures in the short term.
While we strengthen our core for the long term, including sourcing supply chain and our digital capabilities.
Pursuant to our goals of zero waste and zero emissions by 2040 design for life is how we innovate at love Sac.
Making things that are built to last a lifetime and designed to evolve for true sustainability circle to consumers, how we operate pairing our long life products with long term policies and programs that breed lasting and long term relationships with consumers.
We believe loves that can become authentically synonymous with sustainability overtime.
Over the long term, we intend to just keep doing what we've been doing for more than four years straight now generate continued high net sales growth, while increasing adjusted EBITDA margins on an annual basis by driving margin leverage at various points in the P&L structure, where we see increasing efficiencies even with our growth is long.
We can do that we are less concerned about quarterly movements at the gross margin line or other temporary shifts within the P&L.
So in summary, our confidence continues to grow by the resiliency of our performance throughout such a tumultuous macro backdrop.
Our team is strong our strategy is sound the best way to understand why loves that can continue to perform at high levels and remain somewhat insulated from industry suites.
To understand how our designed for life philosophy delivers true innovation.
Our primary product sectional looks like other sexual furniture, but as many advantages to the consumer like modularity decoupling of the fashion elements from the core elements compressed packaging for shipping et cetera. These provide major advantages to our supply chain and business operating model in general.
Even more importantly, we're not a retailer.
We're also not just the direct to consumer business model. Our actual products are proprietary protected by many patents and deliver heightened utility durability and sustainability versus the competition. As these products are adopted now more broadly word of mouth increases which drives great.
Efficiency in our marketing spend and creates a virtuous cycle of growth.
The more product we sell the more we will sell more efficiently.
Combined this fact, which we have demonstrated for many quarters now.
With our ongoing innovation pipeline.
And continued growth as possible.
<unk> are now a few years into this product adoption curve, otherwise known as the diffusion of innovation curve.
Perhaps we're moving past those early adopters, who took the risk on our heretofore obscure brands and unique offering and then to that early majority of consumers, where the real volumes what we.
We are not concerned about saturation of diminishing returns yet because our share of the now 40 plus billion dollar highly fragmented couch category is.
It's still only about 1%. Meanwhile, stealth tech another fantastic and proprietary innovation from Love Sac has only just begun its journey toward acceptance beyond the early adopters on these curves it.
It may be years before our brand loves Atkins gained the credibility in the consumer electronics space to reach into a meaningful number of consumer homes with word of mouth as the driver like sanctions have started to do enjoying the growth that comes at the steep proportion of that curve.
We look forward to that.
Finally, we will remain differentiated if we continue to innovate into new categories. As we've proven we can do and take advantage of this product adoption curve as a core driver for our business into the future.
We are inventor, coupled with a totally direct to consumer omnichannel business model not interrupted by wholesale resellers, where we capture all the data and focus on building long term relationships with each of our customers in order to remarket to them are.
Future interventions. This model is gaining in strength and we believe we can continue to disrupt.
Before turning the call over to Mary I want to thank the entire love sack team for all they accomplished in fiscal 2022, while navigating an uncertain environment.
We are so thankful for their dedication and relentless efforts and.
And we are looking forward to building on our successes in fiscal 2023 with that I will hand, it over to Mary to cover our strategic priorities and progress Marion.
Thank you, Sean and good morning, everyone, our strong fourth quarter and record full year performance are a testament to the strength of our business model and the agility of our team.
As Shawn shared with you our highly differentiated business is benefiting from a growing product adoption curve as a result of strong relevancy and innovation.
In the four months since I joined <unk> as President and C. L. O I really appreciate you spending time enough sharing as well as getting to know all of our associates and all functions on the strategic priority as they are all driving.
What stands out to me the most is the passion and commitment to get back on that loves back and the consistency of the performance they drive.
15 consecutive quarters of greater than 25% growth.
And I take a 48, 7% in the possible yet.
And the last two years alone.
Yourself have doubled and almost tripled on a three year stack basis.
We are very pleased with these record an adult in the store.
Right, we have made against our five strategic growth initiatives.
I will now with yet.
Stocking with one product innovation.
Which the key highlights.
Our next launch in the Middle of October 21, we.
We continue to be very pleased with the launch itself and it is meeting our internal expectations.
The only element that hasn't been different floor plan is the customer demand on satellite side touch transaction is higher than we had anticipated and we are actively getting back in stock on this item.
Non generates its activity with over 1 billion impressions and with a great to jump start the product launch.
South Texas has demonstrated the ability to accelerate nationals S. Eight.
700 basis point as well as the overall brand.
Even for those who are not spying self pack.
Our priority in fiscal 'twenty, three we will be continuing to drive awareness and media.
Peer, while leveraging experiential marketing and I'll touch points to drive demo and conversion.
We expect performance to build sequentially is this year is progressing and we will continue to drive awareness of the strong innovation.
To efficient marketing and merchandising strategy.
In fiscal 'twenty, two our customer lifetime value with $2840 and our customer acquisition cost was $548 and 74.
They bring a ratio of 5.17, which was the highest level yet.
10%, yeah, what to say yet.
This ratio improved despite significant media cost headwinds versus last year.
Innovation and assortment mix drove margin performance that provided them that these headwinds.
Well, it's tough indication was rolled out for the holidays. After successful local testing during memorial day, and Labor day, which resulted in a 25% increase in overall TV wage. In addition, we have expanded into kicks off on Snapchat, which has resulted in more efficient C. P. M that we continue to expect.
Through fiscal 'twenty three.
Lastly, we ran a premium placement for the first time. This placement was around the N F. C. N AFC championship game, and we still have significant performance at triumph over 30 million impressions that translated into trying to the left that website.
Year to date overall media RLI continues to perform above our benchmark.
While we expect the overall media in fiscal 'twenty three to continue to see cost pressure, we anticipate offsetting this by higher conversion and clean stay as they are margin improvement.
Expanding segmentation Catholic capability utilizing a customer data platform.
We will also continue to invest in fiscal 'twenty, it's really focused on driving spend to high Rois performing program, that's just such and continuing to grow with these programs with hyper local marketing and Geo location to drive relevant traffic into all touch points.
We are also very encouraged that word of mouth is now the number one driver of our brand awareness and share gains.
We expect this to continue to be a tailwind for our growth as we continue to drive brand awareness.
And perception.
Our customers and prospects are proving to be very effective brand ambassador with nearly one in four customers, who put just love having experience product.
Family or friends House.
Overall, our brands and business experienced significant strengthening here as of yet.
22 without customer counts up 14, 3% and overall customer satisfaction scores were up 250 basis point, that's a fiscal 'twenty one.
Perception and positioning in the market has significantly improved year rise it yet on this strength has allowed us to drive down discounting across all channels, while taking limited price increases to offset increase and improve our margin.
Number three touch points operation.
We're continuing to see synergies across the various touch points customers can now at sprint Saxon sectional with the addition of South Texas in all of our locations, enabling them to now see and yes, the product offerings before making a final decision.
All showrooms continue to be an important part of our Omnichannel touch points strategy and continued to deliver strong results as reflected in our culture for showroom comp.
Plus 72, 6%.
<unk> plus 95, 1% on a two year comp basis.
With the launch of four new showrooms in quarter four we met our target to open 28, new showroom system Oh, yet in <unk>.
And of course, if all we opened seven keel as well at 16, but by shop in shops in market with them with Aster showed impressive.
[noise] appointments continue to play an important role in all touch points shopping experience and during quarter. Four we conducted more than 3200 appointments, which was a 25% increase over quarter three.
These appointments representing nearly 8% of total touch point business in quarter, four was our highest converting closer I'd say, 50% conversion rate.
Throughout the fourth quarter as opposed to such a specialist team continued to expand our reach across both physical touch points and E com.
And of course, the fall all post purchase specialist communicated with more than 89% of loves that customers, who purchase has met the pre determined dollar threshold for that service.
I want to touch you think that for customers that engage with a post such a specialist with three points four points higher than those that did not.
As planned we expanded our sales and service specialty to all touch points throughout quarter four.
This rollout will leverage his talent to cross trade areas to support customers in their shopping journey, both pre and post purchase with a goal of enhancing the customer experience and further increasing customer satisfaction.
As we look forward to the year ahead, we continue to leverage our strong traffic driving ability to expand our real estates in optimal locations with 75% of all currently planned touch point growth being focused on off mall locations and therefore, driving a four wall contribution up we.
We have been investing in additional recruiting resources focused specifically on the rapid expansion of our field organization.
This investment allows us to continue to scale talent with all price plan.
Paul expanding other channel presence, we're very pleased with the strength of the Costco business well, we are hosting our online roadshows directly on Costco Dot com, we have seen productivity increases year over year, driven by an expanding premium cover them loves post offering that have also significantly expanded product margin year over year.
We continue to be excited about the partnership with best buy and we opened 16 additional shop in shops in cortisol.
We've also seen a best buy dot com business increased at a strong rate this year, which we attribute to the improvements to our customer experience on bestbuy com the launch itself tech as well as the marketing tests and supports itself tech and the holiday sales period.
We look forward to continued expansion of this partnership.
In fiscal 'twenty three we will also continue to pursue opportunities with other partners as all other channel President continues to be an effective way of expanding our brand awareness and reach.
And then by making disciplined infrastructure investment starting with E. Commerce, we continue to see strong year over year result throughout the holiday season.
We made key investments to enhance our e-commerce platform throughout the quarter.
With the launch of our new customer data platform in September and of course, if all we began to utilize all first party data to HIFU targeting and segmentation and all of my marketing assets.
We are excited to harness the power of this tool this year as we continue to enhance and improve our omnichannel customer journeys and it positions us strongly for a cookie less well that is approaching.
As we look to this year, we are obsessed about improving the customer experience and love calm.
At least that's project underway to understand improvements needed in a customer journey.
Most of it would be investing in a new omni channel customer service platform, providing customers with the right support for both reactive and proactive need.
This solution will enhance our already connected omnichannel experience.
By providing valuable business intelligence and positively impacting customer satisfaction and employee engagement.
And then finally regarding supply chain update in quarter four we continue to benefit from our supply chain and inventory strategy, which enabled us to not only over deliver sales in quarter four but also close the gap in a great position with year ending in talks in the high 90 and.
Sampson inventory quantities on the water ahead of the Chinese new year shutdown.
Delivery time to customers continues to be best in class in our category and we remain committed to this performance.
As we look forward, we took bold action back and cautious way to address the anticipated roughly stopped from Chinese new year, and the ongoing pressures on cost and inventory flow over at least the first half of fiscal 'twenty three.
Executing plans to show product flow from which we are now benefiting all.
All diversified sourcing base on key categories has helped us to support our strong and consistent supply performance.
But we do expect some logistic cost pressure in the form of fuel surcharges that vulnerable Cup a father.
Into fiscal 'twenty, three we will continue to focus on the customer experience from order to delivery, increasing our efficiencies reducing cost and mitigating risks in our supply chain.
We will continue to drive our supply chain capabilities and disciplined system on people investments to improve the performance of our inventory our largest asset.
So in summary, we are very pleased with our financial and operational performance in fiscal 'twenty, two and continued to be very excited about the opportunities. This year as we drive our strategic growth initiatives.
We are very proud that all overall customer satisfaction schools ended the year significantly higher than when we started fiscal 'twenty two.
We have seen our customers can really drive awareness and perception of our brand and we want to make sure that we're servicing them better and building closer longer lasting relationships with them.
Our commitment to circle to consumer will help us to continue to drive off the Pat and impact the future growth of our business.
Our strong results reflect exceptional execution by the entire loved that team as we continue to navigate a dynamic operating environment, we feel good about the underlying momentum and trajectory of the business as we start fiscal 'twenty three and we really appreciate all of the teams commitment and passion.
To driving our business.
We are very well positioned to continue to gain market share and benefit from the broader trend is consumers who value purpose driven brand founded on sustainability.
I will now pass the call over to Don I'm sure with you all cortisol adult full year financials in a few details relating to our fiscal 'twenty three outlook.
Uh huh.
Thank you Mary good morning, everyone.
I will begin my remarks with a review of our fourth quarter results and then provide a framework for how we're approaching fiscal 2023.
Net sales increased $66 5 million or 51, 3% to $196 $2 million in the fourth quarter of fiscal 2022.
The year over year net sales increase was driven by growth across all channels with an overall comparable sales increase of 50%, which was due to the success of our holiday campaigns.
Ending showroom count increase of 28 year on year being.
The introduction of eat kiosks, and two mobile concierge touch points.
Higher productivity of our online pop up shops on Costco Dot com with one additional event over the prior year and an additional 18 best buy shop in shop locations as compared to the prior year.
Net sales increased $44 $1 million or 59, 8% to $117 $7 million for the fourth quarter of fiscal 2022.
This increase was due primarily to a $43 1 million increase in comparable showroom point of sales transactions to $102 6 million in the fourth quarter of fiscal 2022 as compared to $59 4 million in the prior year period.
As a reminder point of sale transactions represents orders placed through our showrooms, which does not always reflect the point at which control transfers to the customer and when net sales are recorded in Q4, while comps or orders increased 50%.
At fiscal year end 2022, approximately $13 million of this increase is waiting to be shipped where customers principally related to the timing of customers orders.
We also opened additional loves shaq, chevron's kiosk and mobile contours since the fourth quarter of last year as I, just mentioned, which was a meaningful driver of the Noncom showroom gels.
Increased.
Internet net sales, which are sales made directly to customers through our ecommerce channel increased $11 2 million or 22, 8% to $60 4 million in the fourth quarter of fiscal 2022 as compared to $49 2 million in the prior year period, principally driven by the performance of <unk>.
2022 holiday campaigns.
Other net sales, which principally includes pop up shop and shop in shop, net sales increased $11 2 million or 164, 9% to $18 million in the fourth quarter of fiscal 2022 as compared to $6 $8 million in the prior year period, given the higher productivity of our Costco Dot com.
Pop ups. In addition to the one additional pop up shop during the fourth quarter of fiscal 2022 and the increase in best buy shop in shops just discussed.
By product category, our sexual net sales increased 56, 8% shocked net sales increased 12, 6% and our other category net sales, which includes decorative pillows blankets and other accessories increased 81, 5% over the prior year period.
The decrease in gross margin percentage of 200 basis points over the prior year period was primarily driven by an increase of approximately 480 basis points in total freight cost, which includes inbound and outbound freight.
Expenses and warehousing costs.
These costs were partially offset by an improvement of 280 basis points in product margin, principally driven by lower promotional discounting and continuing vendor negotiations to assist with the mitigation of tariffs.
The increase in total freight costs over prior year was principally related to the negative impact of 590 basis points increase in inbound container freight costs and increased tariffs related to higher product sourcing from China, partially offset by a 110 basis point improvement due to higher levels.
Average of warehousing in the outbound freight costs on higher net sales.
We exceeded the fourth quarter net sales guidance, we shared with you on our last call primarily driven by the success of our holiday campaigns, our gross margin percentage in the fourth quarter of fiscal 2022 exceeded our guidance of approximately 760 basis points driven primarily.
And by lower inbound freight costs than we had projected.
These freight costs are a function of freight rate as well as volume and the expected arrival of those containers, while the rate component was in line with expectations. There were some delays with timing on containers arrivals due to the broadly reported supply chain headwinds and port congestion in Q4 that caused the delta.
Importantly, we expect these deliveries to arrive in Q1 and the good news is that with the redundancies in our supply chain and distribution network.
We had no degradation and sea salt scores or customer delivery times in.
In addition, we saw a higher product margin as a result of left promotions better leveraging of our warehousing and outbound freight costs than projected.
The $59 six year over year increase in SG&A was driven largely by higher employment costs due to an increase in new hires and variable compensation.
We also had higher rent expense from the additional 28 showrooms in a kiosk.
Higher percentage rent from the increase in net sales.
Overhead expenses increased due to infrastructure investments equity based compensation travel expense and insurance.
Selling related expenses also increased primarily due to credit card fees related to the increase in net sales and a onetime settlement fee to terminate an existing agreement with a vendor partner.
SG&A expense as a percentage of net sales increased by 154 basis points due to deleverage within selling related expenses from sales agent fees employment costs travel rent infrastructure investments and insurance, which were partially offset by a leverage on credit card fees and <unk>.
QWERTY based compensation they.
The increase in sales agent fees is related to a onetime settlement payment I just discussed.
You leverage in other expenses relates to the investments we are making in the business that were put on hold in the prior year period due to COVID-19 financial resilience measures.
Advertising and marketing expenses increased $9 $9 million or 63, 8% to $25 $5 million in the fourth quarter of fiscal 2022 as compared to $15 $6 million in the prior year period, resulting from continued investments in marketing spend and awareness campaigns to support our sales growth.
Yeah.
Advertising and marketing expenses were 13% of net sales in the fourth quarter of fiscal 2022 as compared to 12% of net sales in the prior year period.
The 99 basis point increase was due to media activities, which are expected to drive revenues into future periods.
Yeah.
Depreciation and amortization increased approximately $500000 from the prior period to $2 $1 million principally related to current year capital investments, the new and remodeled showrooms.
Operating income was $24 $2 million compared to operating income of $21.8 million in the fourth quarter of last year driven by the factors just discussed.
Net interest expense of $44000 for the fourth quarter was in line with the prior year's fourth quarter expense.
Interest expense principally relates to unused line fees on our revolving line of credit.
In the fourth quarter of fiscal 2022, we reversed the full valuation allowance, we had against our deferred tax assets, resulting in a net tax benefit of $8 $5 million as compared to tax expense of $16000 relating to minimum state income tax liabilities in the prior year period.
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 $32 6 million or $2 three per diluted share in the fourth quarter of fiscal 2022 compared to net income of $21 $7 million or $1 37 per diluted share in the prior year period.
The increase in net income per diluted share in the fourth quarter of fiscal 2022 was significantly impacted by the one time tax benefit of $8 $5 million, which equates to 53 cents per share as I just discussed.
We generated adjusted EBITDA of $32 million in the fourth quarter of fiscal 2022 as compared to adjusted EBITDA of $25 $9 million in the prior year period.
Turning to our balance sheet, our liquidity continues to remain strong as we ended the fourth quarter with $92 $4 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 fourth quarter and fiscal year 2022 financial performance.
Regarding our outlook, we are still operating in a dynamic environment with wider range of potential outcomes as it relates to fiscal 'twenty three.
Given this we are not providing formal outlook for the full year, but we'll share a framework that will be helpful. As you are updating your models.
We are targeting another year of strong net sales growth, which will include more than 25 showroom openings.
We are also continuing to make infrastructure investments to support the substantial multi year growth opportunity that lies ahead.
In a scenario where net sales growth is in the low 30% range. We expect gross margin rate to be approximately 300 basis points below fiscal 2022 levels driven by the continuation of higher inbound and outbound freight costs.
Adjusted EBITDA margin rate in this scenario is projected to be slightly above fiscal 2022 levels. Despite increased freight costs and infrastructure investments as we expect to leverage operating expenses with a net sales increase in the low 30% range.
For our fiscal first quarter of 2023, we expect net sales growth of approximately 39% and breakeven adjusted EBITDA compared to positive adjusted EBITDA of $5 $3 million in the same quarter last year.
Adjusted EBITDA is primarily being impacted by expected lower gross margin of approximately 700 basis points year over year related to higher inbound ocean freight rates and higher outbound transportation costs, resulting from higher fuel surcharges.
We expect to generate cash from working capital in fiscal 2023, and we expect capex to be in the $20 million to $22 million range.
Before I wrap it up I want to mention that in the upcoming fiscal 'twenty 'twenty. Two Form 10-K , you will see mention of a material weakness in internal control related to certain technology controls and.
The areas of user access rates and the monitoring of such rights for systems that support our financial reporting processes remediation efforts are in process and we fully expect that the remediation of this material weakness will be completed prior to the end of fiscal 2023.
Most important this has no impact on our cyber security controls.
Financial statements or the timing of our 10-K filing as a large accelerated filer.
So in conclusion, we are pleased to close out fiscal 2022 with strong fourth quarter results that exceeded our expectations on both the top and bottom line. Our performance continues to serve as a testament to the caliber of the entire loves our team and we are grateful for their contributions.
Look forward to building on this performance in fiscal 2023 and beyond with that we would now like to turn the call back to the operator, who can open it up for questions operator.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate that your line is in the question queue. You May Press Star two if you would 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 sarkies one moment. Please while we poll for questions.
Okay.
Thank you. Our first question comes from Thomas Forte with D. A Davidson. Please proceed with your question.
Great. Thank you so first off Shawn Marion Donna Bravo excellent year look forward to this year. So you sort of touched on this in your prepared remarks, but I wanted to talk about unaided awareness.
So you had a TV AD during the NFC title game. It sounds like you also had wondering the AFC title game and then last night I saw a product reference for your original loves that product in arrears and Renee Zellweger television show.
So Sean I'm curious on your thoughts on how increasing unaided awareness can drive sales for love Sac, even as we're seeing signs that the home category overall is slowing.
Yeah, you know as as I mentioned I think that we are thankfully a big portion of our continued success has to do with timing.
Not to say that the team hasn't done a fantastic job and that's exactly what they've done but loves that just happens to be at this moment of inflection.
Where we are still small.
I have tons of headroom.
As a brand and as you know the product adoption.
Adoption.
At the moment and at the moment and that curb where sectional have penetrated enough where it in word of mouth has really kicked in and driving unaided awareness.
For us, but we're still we're still small and so and so for us at this moment, where the world isn't great tumult, where the home category has gone through an obvious cycle.
That was unpredictable driven probably by Covid and people remaining at home and all of these factors we emerged from that.
In a in a better place than we went into it and by the way, we did pretty well through that cycle and so for.
For us, it's just a confluence of great timing and great execution.
And a great marketing decisions you know we are being very judicious in our marketing spend while taking risks and balancing those factors in and with that our unaided awareness is growing but the category has grown.
And just as much and so.
We continue to have the headroom that we have and I'm sure that Jack well, Mike who by the way. It's also available on the Q&A might my might have some comments on this.
Absolutely Thanks, Hey.
Hey, Tom I'm still here or at least for a couple of quarters right and.
Anyway, I think the key is unaided awareness is absolutely critical because we win it conversion. So if you start to get people into the funnel and they funnel down we know we crush it and the conversion funnel. So it is absolutely important unaided awareness because it allows us to be a comparable to the other critical products and when our products are compare we went every time so.
It's critical and that's why we're just rocking where not only are fighting for overall awareness, but we're just walking at the point of consideration and that's what causes the.
The brand had a trajectory that is well above any of the the category trends.
Great. Thank you Sean Thank you Jess.
Yeah.
Thank you. Our next question comes from Maria reps with Canaccord. Please proceed with your question.
Good morning, and congrats on very strong results here.
First you mentioned the success of your holiday campaign, but sort of in addition to that how much of the topline outperformance would you attribute to having inventory in stock and being able to get it to consumer quickly.
What's your sort of all the new touch points added in the past year between showrooms kiosks and mobile Ghansham et cetera.
Okay.
Yeah, I'm, sorry, I, just deciding who would jump in.
There are.
So many factors to separate out with in the business over the last obviously over the last couple of years.
It's very difficult for us to strip out.
What growth is coming because of what factor.
We and and and and and and the main reason for that is the sheer volume of growth obviously.
It's massive for us and so any kind of industry movement any kind of let's call. It a tailwind from some of the factors you mentioned, whether it's just as simple as being in stock is extremely hard for us to separate out when the growth is greater than 50%, especially but we'll we'll take it we think that for it.
Since the element of being in stock over the past well over.
Over the past many many years, but over the past year in particular has been a huge advantage for us and it's evidence not just of like Oh, we bought plenty of inventory and be prepared when on the management team is sharp or whatever which I hope it's all true.
But it really is rooted in the fundamentals of our product and our business and we've been pounding the table on that for a long time and frankly the tumultuous.
Environment that we've been operating in.
Has been proving ground for the things that we've been saying for years, you know you got to remember that well.
<unk> looked like sexual furniture, they pack very very differently on container ships. They pack very very differently for last mile delivery.
And through Covid touchless delivery no appointment as possible in People's homes for all of our competitors that sort of thing we rode through with all of these attributes.
And just continue to sell at a healthy clip because of these attributes.
And so you know I wish that we had the data to strip that out we don't I think that as long as we're operating in two months.
We will continue to be a winner.
And I think when we operate in peace times, I think we can be a winter as well, partly because of what I mentioned before we are really growing into our a formidable sides are at the right time still small enough to have plenty of headroom, but big enough to matter and become.
On people get on and get into the forefront of people of the consumer mindset.
It will be no less volatile in the next few years based on the many insights that we're obviously seeing so our supply chain will continue to add stability.
To this business and you couple that just as you mentioned Maria.
With the business model on the front end.
A truly direct to consumer model that we are in control of we're not reliant on wholesale relationships. We're not we're not collecting receivables were not separated from our consumer by a middleman.
Have all of the data to those consumers and we're able to market and remarket to them and build those relationships that we talk about through our CTC or circle to consumer effort that by the way very fledgling and just and just beginning but the bigger that our customer base grows the more useful that would be to us to mine.
To leverage.
And to cultivate and so we're very we feel very blessed to be.
<unk>, where we can continue to win and I think based on all of these attributes and others that we don't even have time to get into I think loves that can continue.
To win in these ways and demonstrate how these fundamentally different aspects of our product and business model.
Uh huh.
Delivered advantages.
Got it that's that's very helpful. Sean and then secondly, I appreciate all the color around stealth tax but is there any way you could maybe describe what the contribution from still stuck to your Q4 results and any updates on the attach rate I believe last quarter, you mentioned that it was around 15% or so.
And then.
Finish it at sort of any color on how this product compares to sectional from the gross margin standpoint.
Yes, let Maria highest Mary I'll start and then.
They may want to kick in in terms of the overall contribution. So obviously in terms of South Texas I shed you've seen that we are very happy with the performance in <unk>.
Line with our expectations and that looks at multiple data points that we are looking for us to achieve in all kpis and I think for US. It was what we planned for a quarter for them as we had seen that initial launch in the middle of October through to quarter four.
What we're very happy with that and I think also another point Maria is that we're always trying to balance the moms with having in stocks and you know with many competitors out there that are not able to deliver on in stocks and that's a foundation of everything that love that stuff and that we will never let go of managing that.
Insult to service ratio with demand has always been hey, I'm I don't know Don or anything else that you want to comment in terms of the overall contribution to Q4.
Not not specifically for Q4 and I wont get stopped for the year and I know, where you like you like the numbers, but we were really pleased with the attachment rate as we ended our fiscal 2022 when we expect it to be as strong.
Into fiscal 'twenty 'twenty three so again very very pleased.
Oh Tech overall.
Yeah, and I think you asked about margins as well that's in line with our overall margins. So that is continuing to perform so contribution right. So everything is strong. So yeah, we're very excited but as Sean said before at Sydney early stage of adoption.
And we will continue to put a lot of emphasis around driving awareness, but also wanted to see if that matters in the showroom because what we seem to be proven is that while the consumers see them hit a product they love. It they think its remarkable so what we feel very good about the forward momentum.
Thank you. Our next question comes from Brian Nagel with Oppenheimer. Please proceed with your question.
Hi, good morning.
First off I too would like to add my congratulations on another nice quarter Congrats.
Yes.
Just a question I have my first question just with regard to I know I know you spent.
Time in the prepared comments talking about the supply chain issues you had to deal with it I guess the question I have is if we look at the gross margin performance in <unk>.
In the fourth quarter.
Their track significantly better than I think most estimates out there she particularly better than the guidance you provided I'm really not that far off what kind of like what I would say historic highs.
But the initial I guess not glad it's much like framework or for Q1 would suggest more crushers here.
Current quarter so.
Question is just maybe you could go back on kind of the puts and takes I mean is there.
Any reason why.
From a gross margin your own sourcing.
Sourcing perspective shifted whatever it should be more challenged here in Q1 that it wasn't you pour.
Hi, Brian its done on them, so really as I outlined in my script, you know the rates are where we thought they would come in so there are as high as where we thought they would come in the thing it's based on volume as well because as the freight comes in it sits in our inventory and we amortize it out.
Off the P&L, but the other contributing factor going into Q1 is outbound freight rate the outbound freight cost for us to last mile to the customer is seeing some significant impacts as well more than what we thought last year, but what.
100% covered in all of our models. So not only are we seeing the inbound freight from overseas accelerated costs, we're starting to see starting to see be outbound freight billed as well, but again covered all of those increased freight rates are covered in it.
All the models that I, you know all the I'll call guidance for Q1 and framework for the year, but that's why you see specifically for Q1, it's the timing of the containers were getting a lot more containers coming in in Q1, and then it's the outbound freight.
Okay. That's helpful.
My second question, I guess, a little bit bigger picture, but Sean you talked about the continued initial success here about of self check in that product launch you'll have a feel for that and I know we've talked discusses in the past, but any update as to how we should be thinking about.
Additional production or your newer products from <unk>, either timing or maybe even idea of what these could be.
Yeah, as we've said we will continue to.
Put out new products are at a trickle constantly and and and what I mean by that is.
We're a platform based business <unk> is a very powerful platform been driving most of ourselves, but the fact platform continues to have opportunity to grow we have a number of projects brewing in that realm. The sectional platform has all kinds of accessories and add ons that will be meaningful that will move the needle for us and continue to make.
That platform, even more competitive than it has been here.
Heretofore there are many people who you know the style the shape.
Whatever it is doesn't work for there for them aesthetically or or even comfort wise and we're making all kinds of innovations.
In that realm that will launch quarter on quarter over the next number of years, there's probably a decade less still of <unk> inhibition.
And then you know scope take as our first toe into a completely new category home audio where you look around your home what are the categories that we can innovate and I don't think people expected us to innovate into home audio, but we've done it and I think that sculpt tech.
Is absolutely a newborn.
Can't emphasize that enough like you will be asking me in it and it's fair I'll take the question anytime and pontificate on all of our.
Exciting new.
Product to come.
But [laughter] recognize.
Recognize that like an invisible home theater system, that's shrouded underneath foam and upholstery and then a removable cover but tuned to be music to your ears with no sound quality loss at all because of our patented technology that is a farfetched crazy idea.
Coming to you from a beanbag company.
Not one of the big names in the home audio it's going to take.
Years before stealth tech has matured to the place where sanctions have matured to an even sectional or still a toddler.
So our children still a toddler in the category.
And I say that with lots of love for our own products and for the team, but like I can't I, just I don't know how to communicate that you know so look it'll be a couple of years before we make another major launch into a new category because we don't.
You out.
A merchant.
Beautiful aesthetically pleasing idea on a commodity.
We invent things we solve problems you didn't know you had.
Our home theater system that you know, perhaps your partner didn't.
Even really care about because the last thing. They wanted was speakers cut into their ceiling or why are strewn across the floor or whatever right. That's not a problem that a lot of people necessarily contemplated.
But you know I think we solve that elegantly and will continue to solve problems like that throughout the home elegantly those things take time, they take a lot of invention a lot of a lot of work to bring to market and Meanwhile, we'll will drive awareness of these remarkable products that.
We have launched to the point, where they're beyond newborn ness and newborn.
Newborn stage beyond the toddler stage and hopefully get into.
Some more meaningful growth that comes with adolescence. So we'll see but that really is our point of view every couple of years on a every two or three years on a major product launch in and and in between we will grow the platforms and by the way still Texas. Another platform will continue to grow that platform and so I'm really excited about the future, but that would be my.
Answer that question for a long time to come.
Thank you. Our next question comes from Camilo Lyon with BTG. Please proceed with your question.
Thank you good morning, everyone and congrats also on a very strong close to the year.
To that point you know, there's a lot that's changed from a macro perspective since the end of your fourth quarter.
And I'm curious if you could give us some details on.
The health of the consumer you, you've clearly alluded to a very strong continued momentum in this first quarter sales.
Framework, you provided but I'm, just trying to parse out the components of that.
As it relates to price increases expectations on stealth tech, adding to that is that the doubling of the of the average ticket that usually enjoy.
And really trying to parse out the health of the consumer in a world where inflationary pressures are mounting rates are rising and Russian invasion is creating some consternation around sentiment.
Yeah, Hi, Kimberly Great question. Thank you and so I think the first thing is as we said in our outlook, we feel very confident around demand.
Kicked me also confidence around our ability to supply to our customers and the mushroom day. So I think you know that will continue and we feel very strongly about that and I think also then as she took around disruption we're not yet seeing anything in terms of any dynamics that are really impacting.
Moms or you know traffic into showrooms are on the web are we're really continuing to see great strength.
From a consumer as they buy into whether it be functional solution set around the adult King Ali South Pac so from that side as we looked at you know whether it would be a way to put basket spend we really continue to see great strength.
<unk> side, we feel that that disruptions that you mentioned that you know, we're so small in the category and with everybody else unable to deliver.
With so many delays in so many other things that we truly are winning them you know each and every day because of that formula of success. So obviously will always stay very mindful continue to watch and adjust if we see anything but today, we feel very good as we look forward into fiscal 'twenty three.
Yeah.
That's great to hear and done this added Oh sure sorry, sorry go ahead, Ed how are you doing a couple of things one is our target customer is we think a little bit more protected.
Protected from some of the dynamics in the short run in the total population and on top of that I think something really important to add to Mary's point isn't bad despite promoting significantly last last year. Despite a.
Taking our price increases we've seen the value of the brand.
As determined by our own customers go up and so they are valuing our brand more and more as they get to know it and the disruption I think getting back to the whole conversion. That's why we're seeing the significant conversion and that conversion is really important to talk about because we're disrupting by converting in the category, while everybody else is trying to figure out.
How to play with the small hits or misses within the category growths. We're just playing disrupting in that conversion rate is what's doing it for us.
Okay.
Got it that's excellent to hear thanks for that color Jack I'm, Donna if I could.
Ask you when you think about the guidance the margin guidance that you provided the framework you provided.
Can you just tell us the expectations on our freight costs and if you're embedding a relief in those pressures this year or if you expect those to persist.
Throughout the year at the current rate.
Hi, Yeah, so consistent with what we said at the end of the third quarter. When we had provided an outlook or a framework. We are still building the higher freight rates from a conservative standpoint, as well as if they will persist throughout the remainder.
This year also just remember you know, we maintain because of our strong inventory position and evergreen inventory. We mean, we maintain a healthy in stock position. So even if those were.
Inbound or outbound freight cost started to drop throughout the year, we would still have the inventory that would be impacted by the higher freight so in any of the guidance or the outlook that we've provided we've assumed higher freight rates throughout the full fiscal year.
Yeah.
Thank you. Our next question comes from Alex Fuhrman with Craig Hallum Capital Group. Please proceed with your question.
Great. Thanks, very much for taking my question I wanted to ask you about your inventory it looks like you have a pretty huge war chest to begin.
This year with you can you tell us a little bit of what that consists of if it is it basically just your regular assortment, but just more of it I'm curious how you're managing your big inventory in anticipation of not knowing I guess, what what the supply chain could bring this year.
Yes, Hi, Alex. Thank you for the question I think you know as we look we are I think I mentioned it earlier in quarter three we made a big bets around continuing to build up our inventory levels. Firstly as we saw demand continue to be very strong.
Secondly, also in Tulsa, and the anticipation of the Chinese new year impacts, but obviously are we starting to see also that it that was really put it into our top selling skus and continuing to drive up just at our whole business on states. Besides them so you'll see.
Across the board, it's just a continuation of us always trying to deliver within days to all consumers.
Touched on that level. So the feedstock improvement you know that's just really a reflection of how our customers are feeling you know every day is a love sack is able to deliver to them in such a short time when the rest of the industry is really struggling and continually delay. So we feel really good we were bullish.
Because the second kind of help us go through at the start of this year and we actually are at the best insult levels that we haven't been at so congratulations to the team for anticipating that.
And we will continue to always invest and manage our forward. So that we make sure that we always deliver to our customers.
I just want to add to that too there is a piece of that inventory as I say about the inbound freight that sits on the balance sheet. So there is a you know an increase year over year of about $20 million. So when you look at that in prepaid freight that sits on the balance sheet as well so it's our tangible inventory.
Plus the freight that follows the inventory sitting on our balance sheet, which is what I talked about will go through the P&L as that inventory is sold so just wanted to make sure that your you know your your focus on there's a tangible piece of that inventory growth and then there's the freight associated with it.
Thank you. Our next question comes from Matt Koranda with Roth Capital. Please proceed with your question.
Hey, guys, thanks, and congrats on a great quarter.
Just wanted to attack the stealth Tech question, maybe from a different angle here.
Can you provide any commentary on sort of a lift to average order values either in the fourth quarter or full year 'twenty, two and how those benefited from sell Tech and then just you mentioned in your commentary that customer demand on satellite sides was higher than expected should we be interpreting that as sort of customers are choosing larger systems in the base suggested configured.
And that you guys.
Have put out there and what are the implications for Ao vs.
Okay.
Yeah, I'll start and then that I think Jack can oh, so after a long and a nice to hear from you Matt. Thank you for the question. So obviously from a self check point of view you know we're seeing a oh. These for just the self check alone of just over $3000 and its lifting all overlay a V.
By just over 700 basis points. So a just over $207 per transaction. So are we you know we've been very pleased to see him.
Where that lift has come from and to your point around the satellite side of the Salt Lake to why we didn't actually full cockpit, which we celebrate the biopsy. It is a little bit around the fact that we're seeing the larger configuration being purchased them. So it's not just you know as you go through kind of the six.
Through to the eight so the Tennessee sites.
We're actually seeing the larger configuration thing Boston too. So again, you know that gives us great confidence.
Going forward that people really want to have a great experience for our south Texas. So you know from that side. We all we were in stock we just want to build back the inventory on the satellite side.
I've said that we deliver every day and then Jack I don't know if there's anything else you want to add to that.
Covered it all right.
Right.
Thank you Matt.
Thank you. Our next question comes from Lamont Williams with Stifel. Please proceed with your question.
How you doing guys and congrats.
Just wanted to ask where you are in your hiring plans.
And where where you can expect.
Investing in people for next year, and then secondly, just a quick follow up on almost all play Hollywood product working to bring in new customers and are the initial sales going up whats the breakdown between new and existing.
Professional customers.
Great. Thank you and amongst other questions. So I think the first one you talked to in terms of on the hiring I think from the first point, we feel good about the progress of hiring as we're entering into fiscal 'twenty. Three we did make some adjustments in the sales are whether it be around base pay but we'll see.
So rolled out small cells in and sort of especially but she can cause the great incentive program and I think coupled with the purpose driven brands are you know, we're seeing great you know hiring and really filling in the roles as well as honestly buildings the expansion that we have.
In touch points that donor Shedful fiscal 'twenty three so feel good there I think on the also in the head office.
The hubs. We also see you know great abilities, the highest talents and and we feel very good in terms of them, you know where that settles out so what today, we sell a from a fiscal 'twenty three very strong that I think then in terms of your question around self Tech, yes, we all seeing predominantly new consumers to love.
The fact that they're being attracted to us biased alphatec, which we're very excited about.
But we're also seeing current trends team is coming back and I think you know self take two best action within the home because that's a wonderful thing that there's so much flexibility whether you. Both the sectional 12 years ago, you cannot self check in and that strength since the new technology to your current product is phenomenal the cells take index bulletins.
This higher than anything we've seen before so again it just bodes very well for us if we continue to raise the awareness.
And drive the demos that we feel very confident around the self detect a four months through the year, but as Sean said, it's a it's at the early stage of adoption and we will continue to really get people excited and get them to see he feel it as they are they come to our showroom. So even just understanding about it on the web.
Yeah.
Thank you there are no further questions at this time I would like to turn the floor back over to Shawn Nelson for any closing comments.
Yes, Thank you and thank you to all the investors.
And supporters joining the call, but continue to invest and support love socket a huge thank you to our loves that team, who are amazing and resilient capable and who drive our business forward with lots of love as you say it loves that these results are their fault and have a great day looking forward to another.
Great year.
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