Q1 2023 Lovesac Co Earnings Call
Greetings and welcome to loves Shaq first quarter fiscal 'twenty 'twenty three earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal peach in Houston.
If anyone should require operator assistance during the conference.
Press Star Zero on your telephone keypad.
Please note. This conference is being recorded I will now turn the conference over to 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, Mary Fox, President and Chief operating Officer, and Don at all our Chief Financial Officer before we get started I would like to remind you that some of that 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.
Our 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 you.
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 you and not as a substitute for or in isolation from our GAAP results.
A reconciliation to the most directly comparable GAAP financial measures to such non-GAAP financial measure has been provided as supplemental financial information in our press release.
Now I'd like the turn the call over to Shawn Nelson Chief Executive Officer of Bloodshot Company.
Thank you Rachel and good morning, everyone and thank you for joining us today.
Today, we will start by reviewing the highlights of our first quarter fiscal 2023 performance and then discuss loves shaq strong positioning within the industry, then marry Fox, our President and C. O L will update you on the progress we made against our strategic initiatives this quarter and finally, Donna <unk> our CFO .
We will review our financial results and a few other items related to our outlook in more detail.
Jack Crouse Chief strategy Officer is also in the room to participate in the Q&A session.
Let me now review some key highlights of our first quarter financial performance.
We are very pleased with our first quarter results with top and bottom line performance that exceeded expectation.
Fight dynamic macro backdrop.
Total sales were $129 $4 million up 56% versus the prior year period, we delivered total comparable sales growth of 42.2% and continued to be very encouraged by the broad based strength from both new and existing customers.
We again saw strong growth across our showroom internet and other channels.
Notably we grew adjusted EBITDA to $6 $4 million from $5 $3 million in the prior year period. Despite gross margin pressure of 450 basis points, driven by supply chain headwinds, which Mary and Donna will share more details around.
I wanted to take a moment to share why we believe we have and will continue to deliver higher growth at a more consistent rate than much of our category.
<unk> is not a furniture retailer.
Loves Shaq is not just a direct to consumer marketing engine selling clever seating solutions in a sea of comparable furniture.
At our core love Sac is a branded consumer products company, we sell proprietary home furnishing inventions that are more useful longer lasting and more sustainable than all comparable products.
We sell only direct to the consumer through our web site and physical touch points, including shop in shop partnerships that we directly operate this means the way we approach doing business from the standpoint of product pricing go to market strategy insights and even talent is different than all others within the home furnishings category.
We aim to build lasting and meaningful relationships with each customer.
And because of this direct only model, we have a powerful set of data and insights for each one of our customers.
We're focused on building a brand that is based on product platforms.
Not a brand built around a broad merchandising assortment that includes thousands of products, where they can pizza, mostly on aesthetic like most of our competitors.
This approach leads to fundamentally different outcomes for our business compared to the category.
As a result loves fax business performance and customer experience was not subject to some of the ups and downs, but some of our peers were subject to throughout the different stages of Covid.
I'd like to focus on three main differences that drive that reliable performance, making the point that the strength will continue to benefit us through other macro headwinds and distortions to come.
First our approach allows us to continuously strengthen our product platforms by relentlessly investing in research to understand our customers, we invent new concepts and platform additions that no competitors have ever sort of we test them and we develop them to succeed from launch instead of endlessly chasing new seat.
Styles and collections based on the desires win or a merchandise point of view.
We are totally focused on making a product that meets our customers' current and future needs by evolving the platform with them.
We will apply this approach to other product categories in the home most recently home audio.
Our research shows us that love sex brand perception, among our target audience is quote a good value for my money and quote.
Is advantaged versus our core competitive set and that these perceptions increased year on year in Q1, FY 'twenty three.
We are driving increasing value perception at a higher rate than our price increases.
Secondly, because we are selling a branded product platform not just commodity furniture versus like commodities every sectional we sell it as a legitimate opportunity for those customers to share our brand with friends and family and they do.
Our products are truly unique and the most unique aspects of them are truly novel and readily demonstrable right and our customers living room.
They know how to operate and manipulate their sanctions because they did not just have them delivered and set in place they have to configure cover and perhaps even connect stealth tax with their own two hands.
This is powerful and disruptive since our competitors sell numerous unbranded lines of couches, each with limited appeal or comparable benefits.
This is why we are seeing nearly one third of our customers and the purchase of <unk> tell us that they learned about love Sac from a friend or family member ever.
Every time, we sell a product it becomes a marketing asset Janine to us as a broadly appealing product is being showcased and demonstrated by our own customers in their own homes.
Lastly from an operations perspective, the focus is a critical advantage versus the category.
We do not have to worry about obsolete inventory the benefits of scale are leveraged against these few core products not many and our people truly become experts in the products we make.
We see these benefits of scale manifest in the resiliency of our supply chain the efficiency of our inventory carry.
And marketing spend just to name a few.
This approach is what gives us confidence of continued success in the categories. We compete in and we will apply it in the new categories that we decided to enter thereafter.
We have proven we can innovate successfully into new home categories having.
Having chosen one of the most technologically complex ones to go after first following fractionals.
That is home audio base.
Based on the performance of staff Tech to date, we are confident that overtime, we will gain significant market share even as we were working on the next platform to launch.
We have great confidence in our ability to generate high growth and continually improving profitability on an annual basis at the business leverages rapidly with size and scale.
Even in the face of macro headwinds or disruptions that affect all players in our category and we believe that the attributes of our unique model can provide some insulation from these potential disruptions as they have over the past few years.
We are committed to delivering results to that end that's proof.
Now, let me provide an overview of our positioning within the current environment.
Headwinds appear to have intensified in the last few months, we have observed some moderation in demand only within the last few weeks, we continue to operate from a position of strength as our 56% topline growth in the first quarter reflects which is a testament to our robust business model and momentum driven brand appeal.
We believe that we are still in the early majority phase of the product adoption curve for both shacks and actuals as evidenced by their growing strength from word of mouth.
Our recent stealth Tech introduction is just entering the early adopter phase of that same curve and there's a long way to go.
We continue to be in stock delivering nearly all orders direct to the consumer in just days, whereas industry lead times from others selling soft seating can be several weeks or even months of late.
In stock positions and lead times continue to be a competitive advantage for us driving up loves Saks brand affinity and customer satisfaction at a time when many other brands are driving some discord and disappointment.
Our trajectory of consistent strength in performance has extended pre during and post pandemic.
And we have seen meaningful gains in awareness.
In short the business is firing on all cylinders.
Since our IPO four years ago trailing 12 months sales have quintupled.
We've driven trailing 12 months EBITDA from being negative into the double digits and even with this monstrous increase in topline sales and commensurate marketing expense.
Our C O V to CAC ratio has grown from about Forex to 5.3 X.
I could not be prouder of the execution of the entire loves that team given.
Given the backdrop I know many people believe there is the prospect of recession.
And how consumer facing companies might fare during one is top of mind.
While love Sac was a far smaller business back in 2008 here are the reasons I'm optimistic about our ability to outperform the competition should we enter into a recessionary environment.
One our product platform is built for life and utilitarian in nature. It is an investment and more of a need and a want driven by aesthetic only.
Two the fact that we are so early in our adoption curve, we are driving our growth with market disruptions and share gains. So short run market contractions may impact us to a lesser degree than more mature brands.
We sell to a younger upper middle income customer demographics, who takes pride in what we stand for in terms of our commitment to sustainability.
These are high earners and more resistant to inflation in those buying at the lower end of the market.
Without as heavy and impact from the wealth effect that participants at the highest end of the market may experience in a volatile market.
Four.
We have a rock solid balance sheet.
And five we were much smaller during previous market pullbacks in receptions, but even then the sheer momentum of our extremely high growth rates, while even higher in times of abundance allowed us to grow straight through those pullbacks and even take advantage of other opportunities to further disrupt the category that come at times like these.
Looking to the remainder of the year, while we are very pleased with our Q1 performance given the recent uncertain macro backdrop and the fact, we are only one quarter into the year.
We are not changing our full year outlook at this time.
We remain very confident in the future of the love sack brand and its proliferation.
We are a nimble and capable team that has built this business up organically through lean times in the past and through every kind of headwind.
I believe we can continue to navigate well in whatever operating environment, we are faced with.
It was a great first quarter, we made significant operational progress on our growth initiatives that continue to drive the love Sac financial outperformance I.
I would like to thank the entire love sack team for their constant hard work and dedication to our brand and customers without them, our strong performance would not be possible and with that I'll hand, it over to Mary to cover our strategic priorities and progress Mary.
Thank you, Sean and good morning, everyone, our first quarter results.
Record first quarter for our company as Sean said it was an outstanding first quarter and given these results. We have now achieved 16 consecutive quarters of greater than 25% right and they take a 48, 7% in the past.
Yes.
Any significant market share every quarter in the last two years alone.
Sales have doubled tripled on a three year faithful.
This growth has all been achieved with a strong.
The ability with our adjusted EBITDA margin, increasing by 440% in the possible yet.
That's our hope.
As seen many ebbs and flows over the past three years with most of the heavy brand suffering significantly during the early stages of how does it.
Shifting to me coma and recently all e-commerce.
Suffering from channel shift.
That's all consistent.
And the possible yes.
We look to gain market share every quarter.
Financial commitment there.
This is a result of love.
Strong word of mouth and relevancy of best in class Omnichannel go to market model and all the market innovation and we believe these market share gains the brand awareness will continue.
As we consider our unique omnichannel go to market strategy I'm very excited to share an update today on a strategic partnership with Costco.
And bestbuy.
Our advantaged product selling productivity allows us to develop partnership with other best in class talent to further grow our distribution and not wait.
I don't think.
And the places where they frequently shop or at the largest ticket purchase it.
Not conventionally defined furniture.
Yes, very pleased with the spring type business hosting road shows direct mail okay.
For the last 24 months.
We're also pleased to share that will be restocking the physical road shows in the second quarter.
Which represents significant opportunity to drive sales and more importantly demonstrate physical platform.
I'll talk to customers as they continue to transition back to a more physical shopping.
We know how successful these ratios.
Alright.
We stopping them.
And that's why we've seen our business increased at a strong rate improvement.
Improvements in the customer experience on bestbuy com and strong performance, particularly in our shop in shop.
We continue to be excited about our partnership with best buy and are planning a continued expansion and growth within best buy.
This will include further strengthening the selkirk as it aligns very well with the best lifestyle questions Paul.
Now turning to our first quarter performance.
As Joe mentioned, we are very pleased with these record an assault on the strides we have made against our key strategic growth initiatives, which I'll now with you.
Starting with number one how about innovation, which the key highlight continues to be off the tech loans and they don't say by 'twenty one.
Very pleased with the continued strong.
So.
That's the first of its kind innovation, we believe adoption will continue to grow on a sequential basis.
As we grow our footprint also within best buy we are excited about the potential to strengthen the expense itself pack, which is materially hit with best buy locations meeting the home audio fire, where they go to shop and almost like to develop more significant co programming to drive awareness of our partnership with that.
Hi.
Also as a possible road roadmap with so timed to coincide with national screening day, we partner with Disney plus let's say the at home viewing experience featuring the most anticipated movies and series launching on the streaming platform.
Customers can visit loved that showrooms in select best place to see how Disney pad with the innovation itself picks sounded charge home audio system and create the ultimate family movie Night.
Number two efficient marketing and merchandising strategy based on Kpis. We track, we continue to see distinguishing attribute of our brand's strength and with our core target customer.
These include key metrics, the brand awareness and policy integrating home electronics being a sustainability focus.
Providing the most comfortable seating and reflecting my personal thought among other key metric.
Additionally, our in market media performance is trending as expected and all media cost as a whole all beginning to stabilize with some exceptions, such as search and the marketing.
This is allowed us to return some or testing and expansion into additional innovative programs, including cooking in the nation.
Lastly, we are experiencing a continued tailwind customer receivable during our last quarter. We believe word of mouth with the largest driver of our one of our customers that made it to the purchase side.
Not only benefits our business, but it's also a a strong endorsement of our brand from our customer.
Right, Omnichannel operations, which I'm going to touch points and he come back together.
Like many other businesses more customers return to investing shopping during quarter, one and we began to see a channel shift that physical touch point for me coma.
So let me kind of walk a focal point for us because it we have set ourselves up sufficiently react to these shifts without disruption.
By creating a frictionless business model West sales associates, a consultative sales they influence from any online or physical channel. We have demonstrated that we'd retina, whereas atlas generates it touch points in equal amounts of independent most of our shoppers to utilize both doing that by Jenny I'll now discuss a few ways.
We continue to evolve this business strategy.
This is just a last thing in quarter, one FY 'twenty three we lean more heavily into driving traffic is the touch point as we know that we would see the demo initially convert at a higher rate.
Typically in Q1, we launched Google local may use the Google Beacon traffic tracking to get customers to that close at all.
Presented as well.
Well that compression.
Over 70% of all social media spend in the same trade area marketing, which encourage yourself, but it's in its trade area to go to their local shape.
Oh that was outside of a trade area to shop online.
Also new in quarter, one we utilize specific digital advertising to drive toughened up the Celtic education and conversion.
Teck is primarily purchased in touch points these that drove customer touch points.
Yes.
That night.
Lastly, we added a team of post purchase freshness, specifically designed ultimately purchased by love backlog Com with the addition of 15, we introduced a personalized touch brought digital customer and these specialists connected with 98% have left that I'll call them customers and also more than 90% of all omni channel.
All customers in quotes a lot.
As we look toward touch point Al Shaheen continues to play an important role in our Omnichannel strategy driving strong with all that's reflected in our coastal long complex 53, 2% and two year comp of 235, 9% leased.
These touch points provide our customers with the ability to see feel and now they're all unique products off right.
Q1 traffic rose, 17% up to last year, and up 33% last year and complication significantly outpacing the U S trends as reported by Shoppertrak National reporting so.
Even more impressive is our industry, leading sales per square foot productivity without any Apple and Tiffany ahead of us if we look at the most recent data.
In Q1, we opened 17, new touch points and continues to be on pace to achieve our FY 'twenty three targets.
11, new Chevron one of your best buy shop in shop, and find new Kale.
We continue to see strong performance and lifestyle at all mall locations and actively to see some of that opportunity as possible with all things real estate strategy.
11 showrooms opened in quarter, 182% of those are in off mall locations, primarily made up of lifestyle centers. All state location combines our new touch points are performing above expectations and we feel confident in the real estate pipeline, we have generated as part of our strategy.
Understanding that touch point can also play an important role in our customers' shopping journey. We have remained focused on investing in our team and staffing and compensation and of course, the one we on boarded a team specifically focused on recruiting top talent to the field organization.
We are also strategically investing in compensation, taking a conservative approach on base pay while focusing our efforts on growing variable pay for performance, allowing flexibility to optimize payroll and drive service level.
We are confident in our ability to staff and support our continued growth and we saw a 10 point reduction in open sales positions in Q1, coupled with industry, leading retention fulfillment all of this being balanced to demand with 80% of the field positions being part time.
E Commerce sales and traffic grew year I forget even without finds themselves last year as the pandemic continued it continue to lead in our ongoing improvements in test and learn strategy to optimize the customer journey on our website.
We're excited to be exploring technology updates that we believe will enhance the customer experience. Even further this year and we'll keep you updated as we have more to share.
And finally, making disciplined infrastructure investment we were excited on April 15, two went out there and as our new Chief Information Officer, and we plan to continue to build out as I T T. Walt and his group will play a critical role in delivering its half my parents that drive elevated.
And I'm thrilled to see him hitting the ground running.
Then regarding supply chain updates in Q1, we continued to benefit from a diversified supply chain and inventory strategy.
This enabled us to not only over delivered net sales in quarter, one, but also exit the culture and a strong plans inventory position with quarter ending insult in the high 90 <unk>.
Expected strong position heading into corporate suite with all ethically inventory.
Our delivery times customers continues to be best in class in our category and we remain committed to this fulfillment.
As we look to quarter two we expect continued operational progress despite ongoing headwinds in the global supply chain.
Active strategies to manage inventory and I, but suffice little thing has enabled strongly consistent supply postpone and stuff.
And we will continue to manage through the current environment, while delivering our expected margin.
We're also happy about the progress we are making as we continue to mitigate some of the tariffs in China and ramp up North American production, both of which will create and strengthened redundancy to ensure industry leading insult position.
So in summary, we're pleased with our financial and operational performance during towards so Bob and I continue to be very excited about the opportunities. This year as we further implement our strategic growth initiatives.
Strong results reflects exceptional execution by the entire loved that team and we also appreciative of the passion and commitment they demonstrate that to play out.
The results also reflect the effect of our brand as we continue to navigate the dynamic operating environment, we see.
Confidence about the underlying trajectory of the business and I'll reiterate our outlook for that yet.
Very well positioned to continue to gain market share and benefit from the broader trend of consumers, whose valley purpose driven brand was founded on sustainability.
I will now pass the call over to doughnuts or with you our quarter one results in a few details relating for fiscal 'twenty 'twenty three outlet format.
Thank you Mary and good morning, everyone. I will begin my remarks with a review of our first quarter results and then provide a framework for how we are approaching the remainder of fiscal 2023.
Net sales increased $46.5 million or 56% to $129 $4 million in the first quarter of fiscal 2023 a.
The year over year net sales increase was driven by growth across all channels overall comparable sales increased 42, 2% due to the success of our Easter holiday campaign for both showrooms and the Internet and the year over year increase in our touch points to include 31 showrooms 13 P. S.
Two mobile concierge and 18 best buy shop in shops. Additionally, we had higher productivity in our online pop up shops in Costco Dot Com, which included one additional event over the prior year.
Showroom net sales increased $32.3 million or 65, 9% to $81.3 million in the first quarter of fiscal 'twenty 'twenty three.
This increase was due primarily to a $22 million increase in comparable showroom point of sales transactions to $63 $3 million in the first quarter of fiscal 2023 as compared to $41 $3 million in the prior year period, principally driven by a very strong Easter campaign.
As a reminder point of sale transactions represent 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.
Internet net sales, which is sales made directly to customers through our ecommerce channel increased $6 $1 million or 24, 1% to $31 $3 million in the first quarter of fiscal 2023 as compared to $25 $2 million in the prior year period, principally driven by the performance.
Of our Easter campaign.
Other net sales, which principally includes pop up shop and shop in shop, net sales increased $8 $1 million or 92, 7% to $16 $9 million in the first quarter of fiscal 2023 as compared to $8 $8 million in the prior year period.
Principally driven by higher productivity of our temporary online pop up shops, one additional costco dot com pop up shop, and the additional desk by shop in shops over the prior year period.
By product category, our sexual net sales increased 55, 4%.
Net sales increased 67% and our other category net sales, which includes decorative pillows blankets and other accessories increased 39, 1% over the prior year period.
The decrease in gross margin percentage of 450 basis points over the prior year period was primarily driven by an increase of approximately 640 basis points in total freight cost, which includes inbound and outbound freight tariff expenses and warehousing cost.
These costs were partially offset by an improvement of 190 basis points in product margin, principally driven by lower promotional discounting and continuing vendor negotiations to assist with the mitigation of tariffs.
We exceeded our first quarter net sales guidance, we shared with you on our last call primarily driven by the success of our Easter campaign and higher than projected shipment volume.
Our gross margin percent in the first quarter of fiscal 2023 exceeded our guidance principally driven by lower inbound freight costs than we had projected while the rate component was in line with expectations. It worsen delays with timing on container arrivals due to supply chain headwinds imports shut downs in Q1.
And that caused the delay and cost realization importantly, we expect those deliveries to arrive in Q2 and the good news is that the redundancies in our system in short no degradation in C sat scores or customer delivery times.
The freight rate favorability is partially offset by a slightly higher discounts primarily driven by the tremendous success of our Easter campaign.
The 46, 2% year over year increase in SG&A was largely driven by an increase in employment cost due to the new hires and variable compensation and increase in rent expense related to the addition of 46 touch points and higher percent rent related to the sales increase.
Overhead expenses also increased due to infrastructure investments and selling related expenses increased principally due to credit card fees related to the sales increase.
The SG&A expense as a percent of net sales decreased by 230 basis points due to higher leverage within infrastructure investments rent equity based compensation selling related expenses and insurance, partially offset by deleverage in employment costs and travel the deleverage certain expenses related.
The continuous investments, we are making into the business to support our ongoing growth.
Advertising and marketing expenses increased $5 $2 million or 48, 9% to $15.9 billion in the first quarter of fiscal 2023 as compared to $10 $7 million in the prior year period, resulting from continued investments in marketing spend and awareness campaigns to support our.
Sales growth.
Advertising and marketing expenses were 12, 3% of net sales in the first quarter of fiscal 2023 as compared to 12, 9% of net sales in the prior year period. The slight decrease in basis points is due to improved performance in our media activities.
Depreciation and amortization increased $200000 from the prior year period to $2 $7 million principally related to current year capital investments for new showrooms and kiosks.
Operating income was $2 $6 million compared to $2 $3 million in the first quarter of last year driven by the factors just discussed.
Net interest expense of $35000 for the first quarter was in line with the prior year's first quarter expense interest expense principally related to unused line fees on our revolving line of credit.
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 $1 $9 million or 12 cents per diluted share in the first quarter of fiscal 2023 compared to net income of $2 $1 million or 13 cents per diluted share in the prior year period. During the first quarter of fiscal 2023, the company recorded seven.
$100000 in provisional income taxes as compared to 200000 in the prior year period, there was a utilization of deferred tax assets of $500000. During the first quarter of fiscal 2023 based on the expected generation of taxable income for the fiscal year 2023.
We generated adjusted EBITDA of $6 $4 million in the first quarter of fiscal 2023, as compared to $5 $3 million in the prior year period.
Now turning to our balance sheet.
Our evergreen in stock inventory is an advantage that is not comprised of seasonal merchandize. Therefore, we do not run the risk of being overstocked or having to be promotional to reduce inventory levels are.
Our inventory levels are in line with our projections and our goal to support our growth and maintain industry, leading in stock positions with nearly half to be increase in the year over year, ending balance sheet inventory related to freight costs on our inventory build.
The increase in inbound freight costs reflect the impact of the continued global supply chain situation.
We are projecting that the rate of year over year increase in our total inventory balance to moderate by year end.
Our liquidity continues to remain strong as we ended the first quarter with $64 $4 million in cash and cash equivalents and $31 $2 million in availability on our rely.
Our liquidity continues to remain strong as we ended the first quarter was $64 $4 million of cash and cash equivalents and $31 $2 million in availability on our revolving line of credit with no borrowings.
Please refer to our earnings press release for other details on our first quarter fiscal 'twenty 'twenty three financial performance.
Now regarding our outlook, we are still operating in a dynamic environment with a wider range of potential outcomes as it relates to fiscal 'twenty three given this we are not providing formal outlook for the year, but are reiterating our previously provided framework for fiscal 'twenty 'twenty three that we shared with you on our fourth quarter.
Earnings call.
Which was more than 25 showroom openings and continued 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 continue to expect gross margin rate to only be approximately 300 basis points below fiscal 2022 and adjusted EBITDA margin rate in this scenario will be slightly above fiscal 2022 levels despite lower margin.
Right and the infrastructure investments, we expect to leverage certain operating expenses with a net sales increase in the low 30% range.
We are still expecting to generate cash from working capital in fiscal 'twenty to 'twenty, three with capex spend to be in the $20 million to $22 million range.
Where our fiscal second quarter 2023, we expect net sales growth to be between 25% to 30%.
While we do not guide to calm I will make some qualitative comments on what we have seen quarter to date.
We continue to see strength across our products that over index to the higher end consumer demographic, which still tech being a Prime example, we have seen some moderation at the other end with our more entry level product. So comps have moderated from the very strong Q1 level.
We continue to be up in the healthy double digit range, which gives us confidence to reiterate our full year outlook.
From a profitability perspective for the second quarter of fiscal 2023, we expect a decrease in adjusted EBITDA margin of approximately 355 basis points as compared to the prior year period. Adjusted EBITDA margin is primarily being impacted by higher SG&A leverage with this which is expected to.
To be more than offset by lower gross margins of approximately 710 basis points year over year related to higher inbound ocean freight rates and higher outbound transportation costs, resulting from higher fuel surcharges.
So in conclusion, we are very pleased with our first quarter fiscal 2023 results that exceeded our expectations on both the top and bottom line. Our results continue to reflect the consistent contributions of the entire loves her team and we are grateful for their hard work.
We look forward building on our success 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.
I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys. Please.
Ask one question and one follow up question and re queue for additional questions.
Our first question is from Tom Forte with D. A Davidson. Please proceed.
Great. Thanks, Shawn Mary Donna and.
Tremendous quarter.
The first question I had been one follow up so Sean you sort of talked about this in your prepared remarks, and I never want to list them.
That's for copper recession for anyone but it seems to me that you could really take advantage of a recession in the following ways. He would lower container costs lower freight costs lower component costs I'll give you an opportunity to add prime real estate attractive rates and then also cheaper advertising costs. So am I thinking about the right way and what if anything in my missing.
Yeah. Thanks, Tom.
There are many ways that loves Tac.
Have resiliency.
Through pullbacks and we've lived through these and our past you know we are not.
Not a young company, even though we may appear to be given our.
Meteoric growth rate.
And when you look let's begin by just the sheer momentum of our growth rate.
It can carry a company like this through various kinds of pullback from headwinds because you know a headwind versus momentum that strong Ah well it may moderate certainly won't stop growth.
And that's a heartening to US and then you know all the things that you mentioned from.
Way back in 2008, when left back when we had a few dozen locations, we were able to scoop up locations.
With much more favorable lease rates.
Our negotiating power with vendors across supply of course increase because with so many companies flattening out.
Growth becomes dear.
And to both suppliers.
Maybe here into the shipping companies eventually hopefully and companies like cars will really reaped the rewards that come from having the momentum going in.
And also having so much headroom in our category, even as we become you know really in a lot of ways. The apex predator of couches is viewed as we view it the disruptor with the best product in the category and so yeah. All the other things that you mentioned are accurate and we look forward to being able to take advantage of those things are in it.
There were to be some major market pullback in the meantime.
Out of an abundance of caution we've reiterated guidance as opposed to say taking it up.
Because it is a crazy world out there and we just want to be Super Conservative.
And careful with our you know what the expectations, but we continue to grow and grow at a.
Rapid pace and and do it profitably and we're really happy with that.
Excellent that's it for my follow up I'm, sorry, I forgot to mention Jack Congrats Jack and a great quarter as well right. So I don't think I've asked me. This is a long time.
But what is your M&A strategy I'm imagining that theres lots of opportunities right now to buy assets are cheaper valuations and then how do you feel about running a multi branded strategy either from M&A or launching a second brand.
Hum.
Yeah.
I'll make a few remarks and Jack can can weigh in.
And she comes off of mute.
We are.
Just to build on what was just covered assets become cheaper during uncertain times.
And our M&A strategy, you know is not.
Part of our core outlook, we have been growing through organic growth as you know for a long time and have a very bullish.
Bullish outlook on how we can continue to grow organically at very high rates. However are.
You know on the front end as there are our other directions humor brands out there that have not.
Achieved our strength and profitability in any of their reliable.
Business model there are always opportunities that we are at least looking at and thinking about more.
More importantly, though.
We have great ambition for what we can do on the manufacturing side in terms of cutting costs and becoming more capable on that front. We've created a product that has the most potential for.
Cost savings you know at J E T.
Low SKU count.
Unchanging at its core uniform product lines and what we can do through manufacturing prowess also gives us a lot of.
Opportunity as we see it to consider.
M&A as an opportunity to hit the ground running from a manufacturing standpoint, but again trying not to be distracted given our major growth rate. So we continue to be opportunistic and we will continue to be very prudent on that front. We have a lot of cash overall, given you know compare compared to our size.
I think that you know it continues to be something we can contemplate in terms of multi brand.
I'll, let Jack weigh in but we believe that there are so many opportunities within the home right. We view we view our territory is from your mailbox to the back wall or fence of your property and everything in that realm is ours to disrupt and of course, we'll go after the high ticket meaningful items.
First and do it with a design for life approach things built to last a lifetime designed to evolve them.
Might there be a spin offs might there be a product categories are so large that they could even become their own brand or company sure. All these things are are.
Things that we contemplate in terms of you know the lower and it's not something we view as necessary from a brand.
Let's see.
Fraction of our brand to let's say capture a lower end demographic or or even higher end demographic sexual democratic product. That's a beautiful without a definite example to deny it for life products you can buy it naked without covers that is and use them without covers and step your way into them. One piece at a time you can buy them full.
We closed with a.
Top grandmother covers the cost more than the pieces and so it really even though we are at the high end from a ticket size.
We believe that we can approach a wide swath of customers and we haven't even begun to do that because the core demographic is so thick. The opportunity is so big with what we're focused on and we encountered such little market share already even at you know half a billion in sales last year roughly.
So it's that's a little market share that it with one product category that we continue to stay.
Stay focused on what we're doing but I don't know Jack what what else can you lay on top of that.
Yeah. Thanks. Thanks.
I did get off mute. Thank you.
I got to thank Sean.
Sean you're summarizing it in two ways.
One I think for the next three to five years, we clearly have plenty of runway.
Organically with love sack, and we know based on our consumer insights our research our new product pipeline I think the way we look at my position in the short run is working with Mary and the team is how do we strengthen our process our structure and governance to get the most out of the ideas that are going through the pipeline and then I think the second phase.
But then beyond three to five years as well.
What are the opportunities that the F. L creates for us in the affinities with future customers and we have a great deal of opportunities, we're looking at because of the.
How strong the F O rings true with all of our core customers and I think as time goes on we'll be able to talk more about the filters were looking at but great question.
Yeah.
Thank you.
Our next question is from Murray out reps with Canaccord. Please proceed.
Hi, good morning, and thanks, so much for taking my questions and congrats on very strong results here.
So you mentioned several factors that have contributed to the strength in Q1, including your Easter campaign, I guess anything else you'd highlight here again from the maybe competitive positioning or consumer behavior that may have sort of attitude revenue outperformance in the quarter and then my second question is as it relates to your outlook. So you you mentioned some sort of moderation in that.
That in the last few weeks.
Anyway, maybe you'd be able to quantify that really gets you to sort of the 56% growth rate in Q1.
Yes, good morning, Mary I will take that question. So thank you in terms of quota, but obviously, we were thrilled with the performance that you highlighted are and what we saw with particularly the great success of our Isa campaign.
And I think that's really building on word of mouth, staying with that Sean had mentioned earlier and just the continuation of the trend stickiness that continues to bell I think one of the other highlight I mentioned about the Google local that we launched our in quarter, one and particularly around the Easter campaign, and we just saw it.
The traffic really belt into showrooms as well as conducted online but that really is just helping us be very prominent that's costing us thinking about purchase thing that we all very much top of mind. So you know that momentum really continues and I think Ken you know we've seen south tech really continue to build.
And just great excitement I'm, even you know I think when you look at the results in other channels for courts of law that 92% you just see that continued demand really garage.
It all starts in terms of your question then on quarter. Two I think a couple of points of contacts that we should always can say that.
He is closer to four this year, we were up against our biggest comp.
The since the last two years back and it is the biggest cultural fit yes, and I think when you think consider that we see the comparable as we go into the second half with a yes. So we're really against that just that higher number. So some of the moderation of larger map can really be considered.
Kids two to that comparable and you know we still continue to see very strong demand you know that kind of continued as we've opened up in Q2, but we're also obviously really listening and seeing all of the macro dynamics in the market and just being very thoughtful in terms of.
For a guy that to make sure as always that we deliver.
And performed to the highest standards, what we've done for the last four yet.
I don't know John or anything else that you want flat on Q2.
No I I married.
Great.
Okay.
Great. That's very helpful. Thank you very much.
Thank you Mary.
Yeah.
[laughter].
Our next question is from Brian Nagel with Oppenheimer. Please proceed.
Hi, good morning.
Also I'd like to add my congrats on a nice Q1.
So Mike My first question and it's gonna be a bit of a follow up to that just the prior question with regard to.
The commentary about a slower slowdown here in Q2.
So you mentioned it it would seem to be focused more on the kind of the lower end of the other product continuum is there any other color you can give us.
What you're seeing kind of in when it when it started.
We extended our I guess, the obviously the depth if you will to slow down.
And then I guess the question on that would to the extent this persists.
Where are there levers you would pull.
<unk> tried to try to offset letters levers from within the the lovesick model to try to try to offset that to a number of follow up.
Yeah, Greg I'll take that and then.
So and anyone else can happen, but I think the first thing Brian is all husky, we came off a very strong quarter, one including eight pool that was very strong for us and that you know compared to anyone else in the market. We have the best result, and really continued to gain share. So I think we need to be careful as we talk about that moderation that we've.
Highlighted that it's only for a parcel for you know as we started the quarter.
And as I said earlier, we're up against some tougher comps on that yes that base it and that significantly stopped the sat down and comparable in the second half. So how much of that moderation is up against that Satcom senses, you know with some of the dynamics that that's a thing you know.
We will obviously see how that comes through but we feel very good in terms of the continued growth across all of our channels. They see you see the probably fourth it being close as customers are coming in highly engaged with the brand. So I think we you know we recognize the dynamics, we just need to learn and go through it which is why as Sean said.
We're not raising guidance, we're holding to guide that and then as we look to your second question around if that was to pause that we've looked at every way that scenario in terms of lending to the guy that said more and we feel very confident on that even baking and what happens as we see a bit of a moderation just at that low end.
I think it's important to remember at the high end, we're actually seeing acceleration and continued growth that including the south Texas. So we face in the end with you that in every way, but I think wholesale. It's important you know Q1 performance pain without us using all of our lever to the degree that we have done in the past.
Our discount level was at the lowest rate that we've seen over the last few years.
You know there's opportunities I think tell me you mentioned that earlier with them, we can buy marketing at lower rates, which were also starting to see moderate and many other lever to be able to drive the business forward. So you know if we were considering you know discussions today, we feel very good as we go through the rest of the year our in stocks are even better.
And then they were this time last year, our touch points are performing at a very high rate and so I think from that side as we found everything we know today, we feel very confident for the year to go.
Got it.
And then maybe my follow up just on.
On the gross margin side so you.
I know, we talked we've talked a lot about gross margins for last several quarters you mentioned a lot in your prepared comments here, but as you see b so to say the supply chain dynamics.
Continuing to unfold.
I mean, how should we as we're looking at our models how should we think about that path.
Back to kind.
Kind of historical levels for for grocery for gross margins a lovesick.
Yeah, I think look first of all to don't know what Mary said loves that we'll continue to do what it what it's been doing high growth rate. The top line continued to pursue our leverage at the bottom line continued to.
You know our North star is to is to grow EBITDA, even as we are.
Scaling rapidly and so we're very confident in that outlook and if that continues.
Through the strengthening of the dollar.
In many respects versus foreign currencies.
Through.
Yeah.
Right now you have a lot of companies are with too much inventory and their inventory is not like ours, it's not evergreen it's it's not.
The same as ours right our inventories highly concentrated on just a few key skus that will be relevant.
15 years from now and so it creates no pressure on us to make radical moves and you start discounting and dumping and then and then you get them you pared that that with the.
Basic economic outlook, that's out there and you have a recipe where a lot of companies will be struggling to achieve the kind of reliable.
Profitable growth that we believe we can achieve them as that happens our strengths with our suppliers our strength on the world seems a from a from a from a sourcing perspective as well as our efforts in manufacturing.
We'll drive this.
Right back to where we want to be on a gross margin basis, which is always been again, our north star is the mid Fifty's range outside of the turbulence that had been kind of undeniably swirling for the last couple of years.
In the supply chain realm, you know whether it be the raw costs at good times or whether it be just availability of containers and cost of shipping containers all of that and so our pass back is continued growth.
And that buys us deleverage versus all of these factors that are swimming I think it's as other companies normalize their inventories.
And pull back.
On the inflow do they have to deal with because there's so much pent up there's so much demand it is.
Is already on its way and in many cases, it's created hamburger out of customer relationships with those brands and we'll just continue to be steady and so we.
We view a lot of these negative forces on our gross margin of late as temporary and we do believe that many of them will subside over time.
Even as we still have levers to pull on price you know a lot of our a lot of the competition has been very aggressive to take price way up at the outset of dish and now you could see some of these.
Same brand potentially.
Whip sign with prices needing to come down which over inventory positions and things like that and so our kids steadiness and that will bring us back to the gross margins that we believe continue to be.
Our guiding.
[noise] Northstar.
And that we will be able to deliver against.
Got it.
Thank you.
Our next question is from Camilo Lyon with B T. I G. Please proceed.
Thanks, and good morning, everyone, a very nice job on Q1.
Just going back to the commentary around the moderating trends youre seeing here in Q2, So you talked about the softening from that lower income consumer.
Can you just tell us how that's actually manifest in your business is it.
Smaller couch sectional purchases is it an increase and in credit applications I'm, just curious to see how that's manifesting and then the second component of that question is.
Is the higher income consumer more than making up for that moderation by the low answer then.
I have a follow up.
Yeah. Good morning, Hamid I am. Thank you for the question. So I think in the moderation again as I said earlier. It told me a few weeks and I think you know when we look on a two year stacked basis, you know we have to kind of be careful because the some of the lower end. It actually when we ran the numbers. They were very strong last couple of years.
But what we're seeing is just more of the standard so which is that opening price point is still probing and so good but just slightly softening to why we were obviously often incredibly successful coastal waters, but what we do continue to see is that the.
Other cells that we continue to have great growth and in some places actually accelerating and we continue to see self tech bells egg.
Right. So what you know that continue to drive in a L. B.
And and all that we can drive you know as we think about you know.
Bringing traffic into the showrooms that we go through the year added as well as to other channels and online there's plenty of room for us to be able to drive.
Drive that traffic.
And the acquisition of customers as we can.
Kind of see them. So I think it's just you know, we're obviously, giving you full transparency as we see the early part, but I really do believe as we look at the comparable is the toughest quarter on that two year stack comparable it really stopped the scale down in the second half and that's why we still feel very confident you know as we look to.
Our guidance for the year and I think when you couple you know an industry, leading great quarter, great year Grateful, yes, all the all the things that we said earlier and we see the customers very satisfied with our performance and stuff because everything Sean that's a great way to connect with a customer we feel very comfortable.
But then as we go through the rest of it yet.
Great and then.
Then just following up from that line of questioning.
Does this moderation, even though it seems like it's very.
More comp driven.
[noise] comparison, driven does it change your view on the promotional strategies that that's been a tailwind for you guys now for <unk>.
Well over a year and so I'm curious is this mhm altering how youre going to view your promotional cadence with respect to.
You know the figures that you have four units bought and what that triggered some of them from a discount perspective.
Yeah, you're right absolutely cause that in the law, Yeah, I'm, all we've seen a very benign promotional the parent you know environment.
And I'll just kind of wait so still continues to be Noah, but like anything we have a very agile business.
He has an opinion in terms of you know whether it might be opportunities and you know how do we thinking with what our customers are thinking that they want to buy a with love back and making sure that we went to do can say that the promotional level. It may not be for everything it maybe on certain product types with we've been testing and we've seen great success with that.
That are in the east the campaign. So you know like everything and we've always done we will continue to be agile. The phone with me is needed all of that is factored in it's a two hour guy doesn't allowing full room, if we need to drive higher traffic acquisition et cetera through promotions and Oh.
We will continue to respond accordingly.
Yeah, and I would just add that our point of view, our overall point of view on what this company can and will deliver.
Even throughout these turbulent times is very high growth.
In a in a in a category that you know is a mess right now in many respects and in that high growth comes from.
Organic word of mouth.
<unk> affinity for our totally proprietary products that continues you know even even though there are headwinds.
Against maybe the home category in general and consumer in General what have you.
Headwinds cannot.
Cannot mitigate the ROM momentum that we've built into this plan and so our moderation statement in terms of just let's say reiterating or a framework.
Framework for the year is out of an abundance of caution you know this is a very turbulent time with all kinds of macro craziness and we're just going to be very cautious even as we still experience.
I, probably leading growth in the category coupled with a path to continued.
Expansion of of profitability and so you know quarter by quarter, maybe lumpy. There are some comp issues that will have to face in terms of just tough comps coming up and whatnot, but the overall delivery of this business will continue to be what it's been we're very we're very proud of that.
Yeah.
Prudent conservatism is definitely appreciated in this environment.
Yes.
Yeah.
Our next question is from Matt Koranda with Roth Capital. Please proceed.
Hey, guys, it's been covered quite a bit but just wanted to see if we can put a finer comment on your second quarter or a finer point on the second quarter commentary. So maybe could you just confirm that you've been tracking within the guidance range of 25% to 30% quarter to date or are you assuming things get worse.
Worse incrementally for the rest of this quarter to get to that guide.
I think Matt when we look at the whole quarter, we feel very good in terms of where we're tracking and that's exactly as we face whether it be thinking through with Memorial day, all the way through July the phone. So we feel very good at it and we certainly at this stage would not be giving guidance for the quarter, we didn't have the utmost confidence.
And I think as <unk> said, you know, we're being prudent understanding all of the retro account that and whatever they sang but that we certainly feel very good and and as you know we said that we haven't even really utilize many of I'll leave us.
Tool kit that we can't say when power up accordingly, and we are very agile and very fast and we can respond accordingly, so that we feel good Matt.
Okay, Great and then just on the inventory growth front, you guys called out.
The some of the growth was due to you know sort of increases in inbound freight, but curious if you could maybe speak to unit growth.
Your inventory on a year over year basis, and then maybe also.
How much stealth tech.
Just kind of Directionally is embedded in that inventory growth as well so kind of support.
The higher attach rates you guys are saying.
So I was I guess I concur with that.
About half of the inventory increase is related to items that are not comping over prior year. So for example felt pukka and freight.
Spell check obviously is the smaller part of the of the the non comp piece of it but there you know there are millions of dollars in south of inventory that we did not have this time last year because it was all at once.
In the third quarter of fiscal 2022, but yeah half of our inventory growth is in pure we'll call. It typical heat side and stock cover.
We had absolutely plans related to just supporting the increase in sales volume of <unk> and the other half was related to the increase in freight in costs I think the important thing to note. There is that that was all planned right its inventory, where I had mentioned that we have.
Not at risk.
It's evergreen we don't have seasonal inventory its we thought and planning again planning at the beginning of the year we'd.
Being very prudent to hardly inventory on hand to maintain our in stock inventory positions.
So I hope that answered your question.
Yeah.
Yeah very helpful.
Best of luck with the rest of your guys. Thanks.
Yeah.
Our next question is from Alex Furman with Craig Hallum Capital Group. Please proceed.
Hey, guys. Thanks for taking my question and congratulations on the really strong quarter I wanted to ask about the return to Costco that used to be a really big part of your business. You know now it looks like youre going to be going back to their stores for the first time in a couple of years I think if I remember correctly.
In the past that that partnership was dilutive to your margin rate, but it was great exposure you know got got it got the product in front of a lot of people at the time when your awareness was very very low you know now that you're a much bigger company can you talk about what that partnership is going to look like now that you're back into stores and how.
The margins of that might compare to your love sack showrooms as well as the showrooms that youre starting to operate now within basketball.
Yeah, great. Thank you for the question Alex So yes, we're excited equally.
In terms of the return to the Costco physical road shows.
You know obviously as you rightly remember that that we felt that it was just as kind of a pet so oh, sorry, mentally it's great because it feels like we're all getting back into a retail so that it will stop and we make the numbers into a framework for the rest of the yes, but I think one thing that's a real advantage.
Time is we're gonna be stuffing them all of the road shows with our own team, which is an elevation to the model before we really believe will drive stronger conversion them. So you know for that type of silver I get I think in terms of your question as we look at that.
P&L, yes, the product margins are a little.
Little bit valuation, but EBIT or in practice all the time. So we will end up across the P&L and as we can say, they're all about decisions because clearly we have very strong momentum across all of our channels and.
We see this as being additive from the topline and then falling back.
So I finally partnership.
Yes.
Okay. That's very helpful. Thank you very much.
Thank you Alex.
Yeah.
We have reached the end of our question and answer session I would like to turn the conference back over to Sean for closing comments.
Yes, thank you to all of our investors and.
Supporters, who continue to watch our company grow where it's especially grateful to our entire love Sac family. The team that has built this company continues to put up amazing growth even as we continue to disrupt this category that we operate in.
I appreciate you being with US this morning.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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Yeah.
Okay.
Oh.
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