Q2 2023 Lovesac Co Earnings Call
[music].
Greetings and welcome to the Love Sorry second quarter of fiscal 2023 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host Rachel Schacter with 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 and John Hart, Chief Financial Officer.
Before we get started I would like to remind you that the information discussed will include forward looking statements regarding future events and are.
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 FCC, which includes today's press release, you should not rely on our forward looking statements as predictions of future events.
All forward looking statements that we make on this call are based on assumptions and beliefs as of today and we undertake no obligation to update them, except as required by applicable law.
Our discussion today will include non-GAAP financial measures, including EBITDA and adjusted EBITDA. These non.
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 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.
All over to Shawn Nelson Chief Executive Officer of the watch that company.
Thank you Rachel good morning, everyone and thank you for joining us today.
Today, we will start by reviewing the highlights of our second quarter fiscal 2023 performance and then discuss love sack strong positioning within the industry there.
And then Mary Fox, our President and C. L. L. Well update you on the progress we made against strategic initiatives this quarter and finally, Donna del Amo, Our CFO 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.
We are pleased with our second quarter results and with top and bottom line performance that exceeded expectations against a still dynamic macro backdrop.
After recognizing some pullback in consumer spending at the outset of the quarter as we said on our last call pursuant attenuation was less dramatic than anticipated.
This was up against last year's very strong Q2, when we achieved our highest quarterly growth rate ever as a public company.
I'll also remind you that our results are perhaps you're on the most recent in real time results in the home category, because we typically ship out and deliver goods just days after order and do not carry much of a backlog ever.
Now, let me review the highlights of our second quarter performance.
Total sales were $148 5 million up 45% versus the prior year period we.
We delivered total comparable sales growth of 31% with broad based strength from both new and existing customers.
Adjusted EBITDA grew to $14 1 million from $12 4 million in the prior year period, Despite expected supply chain driven gross margin pressure as we manage our expense structure with discipline.
We continue to invest in high ROI marketing and advertising.
They key contributor of the brand awareness gains and resulting sales success that we're seeing.
Importantly, we delivered these results against an industry backdrop that proved challenging for many illustrating our market share gains off of a very small base and a large and fragmented total addressable couch plus full Mario market.
$46 $2 billion.
The home category is down year on year into the double digits.
Our very high growth rate quarter after quarter end, four and a half years now.
Should speak for itself.
This growth is fueled primarily by the compelling value proposition of our design for life product platforms, which are reaching brand awareness and customer adoption rates that are currently an important inflection points building strength on strength.
So why have loves that proved to be so resilient throughout the past number of tumultuous years and even the most recent quarters.
Sustainability in stock position.
Best in class showroom economics rapid product adoption and growth with profitability are all a direct result of our designed for life business model in action.
We believe this will continue to be made apparent as we continue to grow.
We do not merchandise a broad assortment like most of our peers do.
We're not operate on seasonal cycles like most of our peers we.
We don't create all of the operational execution, all inefficiencies that come along with that model for the business or for the consumer.
We invent and patent new solutions and categories with big ticket items and high margins to be had.
We will continue to expand on this.
With superior products paired with depth marketing.
Superior market share.
And we are well on our way to achieving that.
A long way to grow scale we.
We believe we can ultimately take an outsized portion of market share with superior solutions like these.
Sectional with their married advantages are currently the best example of the scale that it's possible for a design for life product.
Having only achieve between one and 2% market share so far in a highly fragmented couch category.
We believe we are finally through that early adopter phase and on to the early majority phase of that classic product adoption curve.
For this reason we believe the best is yet to come.
Word of mouth is now driving nearly a third of actual purchases because of their unique and highly competitive quality.
This bolsters, our marketing rois ongoing versus other competitors, who essentially sell well designed but generic solutions.
We have demonstrated the more we sell the more we both sell.
And with our customer satisfaction scores, improving even as we scale due to our continued investment in processing system services and infrastructure.
We believe love Sac is a brand that can continue to gain further strength in the mine or the consumer.
This is in part why our growth has been so resilient.
Our growth was very high before covered during COVID-19 after COVID-19 and now even in this challenging macro environment continues to be extremely strong versus the broader home furnishings category, which was down overall this year, even as we are way up.
Finally, we have built our brand with the right consumer in mind the.
The young parents wanted.
We are targeting with our pricing marketing and advertising.
Resilient group during times like these these are high earners at the peak of their household establishment and furniture investment years.
35 to 45 years old our narrow focus on the couch at the sub category of the broader furniture category is no accident.
There are many objects within the home that are truly discretionary spend.
And as we know through our considerable investments in research when household need to replace worn out so close relocate or remodel. The couch is on the top of the list and furniture priority.
And our marketing is there.
Highlight the unique attributes of our platform and win their business, our marketing spend in absolute dollars growing nearly as fast as our topline cell counts.
This further strengthens our note the bigger we get.
Our now 174 loves that touch points, 158, showrooms sports and kiosks and T mobile concierge loves got trucks.
And seamless omni channel execution drives conversion.
Those three drivers replacement relocation and remodeling are the top two drivers of sales professionals.
Lastly, followed by new home purchases.
That dynamic is unique to love sac versus the broader category, which is why even in times like these we believe we can continue to thrive.
Our growth strategies are designed to fortify our position and building our market share gains and I am proud of the progress we continue to make against each initiative.
From the more recent strong reception of our key innovation stealth tech to the effectiveness of our marketing and brand awareness investments.
The expanding productivity of our showrooms and healthy digital channel growth, we're thrilled to see the impact of the work you're doing across all of these areas continue to drive our top line performance and fuel our market share gains.
The runway, we have with our growth initiatives combined with our focus on disciplined execution gives me confidence in our ability to continue our share gains in any type of macro environment.
Even as we navigate the supply chain challenges the industry is facing our teams have demonstrated strong expense discipline and prioritize high ROI marketing spending as well as investments in key system talent and infrastructure in order to solidify our foundation to support the long runway of growth that lies ahead.
It is the supply chain and technology investments, we have made and continue to make that have enabled our industry, leading in stock position and improving customer satisfaction scores.
In support of our actual and planned market share gains.
The accelerating growth investments in these areas as Maryann Donna will discuss momentarily.
While we could easily deliver adjusted EBITDA margin expansion this year.
Deploying approximately 100 basis points of EBITDA margin towards these important technology and supply chain areas is the right decision for the operational efficiency of our business and in turn customer satisfaction, which will set us up to win ongoing.
Finally, our commitment to sustainability is foundational to how we operate and continues to lead us to unique and competitive outcome that resonate with consumers in these changing times.
Sustainability loves Shaq means not only sustained hyphen, a bowl products things that actually sustain.
But a sustained hyphen a ball business model that you are seeing the fruits of every time we report.
We will marry our long term design for life products.
With long term focused services program.
And policies.
According to our circle to consumer philosophy.
Resulting in long term relationships with customers, who love our brand for myriad reasons.
Even in high growth mode.
Have always and will always operate this business with great discipline, managing our expenses and investments in balancing our growth goals with a focus on profitability and returns are.
Our stated mission include the mandate to build the world's most people love at home brand.
While achieving targeted zero waste and zero emission by 2040, we're rapidly on our way.
Lastly, I want to thank the entire loves that team for their commitment and execution have enabled our financial and operational performance, we call them the hashtag love Sac family.
We are able to deliver what we deliver because you do what you do.
With that I'll hand, it over to Mary to cover our strategic priorities and progress Mary.
Thank you Sean.
Everyone.
Quarter two results marked a record second quarter for our company.
John said it was an outstanding performance and given these results. We have now achieved 17 consecutive quarters of greater than 25% plus.
This represents a 45, 4% and the possible yes.
Demonstrating significant market share gains over the course of time.
Using fiscal 'twenty 'twenty as a baseline of three year come from socket Tien Tsin, it's 15%.
Strong focus on profitability on an adjusted EBITDA margin and solid growth of over 500%.
Same time period.
We're also encouraged by the continued demand we are seeing this rule, which is the common shop comes off the wall and the category is experiencing a show on shop.
According to our estimate show that we continue to win with our customers.
Significant market share as the strongest performing competitive brand in this category.
It's a large and highly fragmented market in which we operate present significant shallow pit, you'll see even if macro conditions lifted handler favorable core demographic.
This is due to the unique value that a bill Hello products helped drive the strong word of mouth and relevancy.
Disciplined execution of our key strategic policy, which I will provide a few updates on now.
Starting with one product innovation, we continue to be pleased with the process itself Tech, which was a game changer for us in the category.
Some points here are some key highlights.
We saw attachment rate increased significantly this quarter, one fiscal 'twenty three.
The option continues to grow on a sequential basis.
This is meaningful is that shows what the self help Hudson AMC, mainly three time boxes those that did not the initial success of the launch and the sequential progress we are seeing and what is a multiyear commitment provides us reassurance support product continue to build relevance.
The appeal.
Number two efficient marketing and merchandising strategy.
Of course, it too we continue to be pleased with our ability to maintain product margin. Unlike the inflationary pay environment.
This is based on Kpis, we track, we continue to see strengthening of our brand health metrics.
That's a great trend there.
This bodes well for alcohol with higher share of our category as we continue to expand awareness of our media mix relationship with Costco in best buy.
Leveraging our very strong word of mouth referral from customers, which is again, our number one driver of awareness.
Customers, who made it to the purchase date.
Further the level of cost of the purchase funnel strengthening different type of brand health and a focus on consideration to conversion targeted media.
We continue to see all in market media performance trending in line with projections and all media cost as a whole has stabilized which allows us to lean into testing, including new programs, such as spending on pixel and additional local in Haifa pockets of media.
Which brings me then number three omnichannel operations, including touch point on E Commerce.
We continue to see strong you can call myself. This is also up 25%, which was also bucking the trend in the copper grade.
It should be at least adult the strength of our brands, adding new digital programs and cloud mix as well as the expansion of whole funnel advertising, so out steps and social media marketing.
E Commerce optimization of the customer journey remains the main focal point for the balance of the year, helping them to the holiday season.
But there's just a marketing in quarter, two we continue to expand and lean into advertising that drives the shopper in stack closest touch point.
Funding into new local based programs like E cheap local on the amplification of G and marketing and social media advertising.
Of course, the suite, we're launching a.
Our new Omnichannel customer service platform, allowing us to better service, our customers across all of our customer touch points and increasing customer satisfaction and loyalty.
As we look towards touch points, all showing continued to play a critical role in our Omnichannel strategy driving the strong results delivered in quarter two.
Strengthening of the lower portion of our purchase funnel is supported by expansion of the number of highly productive touch point and location based digital marketing targeted at driving traffic into lose like ocean.
In quarter, two we opened 11, new showroom touch point someone chaos, we continued to see strong performance in lifestyle and off mall locations and plans to actively pursue those opportunities as part of all evolving real estate strategy.
11 showrooms opened in quarter, two eight or off mall, primarily made up of lifestyle center locations.
We are very happy with the performance of things.
I'll touch points, which are performing above expectations.
Delivering higher sales per square foot than off pockets of performance.
As we continue to focus on delivering a best in class Omnichannel experience in quarter, two we accelerate that.
Investments in our new Omnichannel cloud based Pos platform and launched a strategic relationship with project spring.
It's T O a son, who is a world class global Pos provider and aligns closely with our technology process. This.
And that lays the groundwork for 15 location pilots in quarter four paving the way for the balance of the chain Rollouts in fiscal 'twenty four.
This new P. O S aims to increased transactional efficiencies and set the same operating model up for greater productivity, especially through peak times.
And then for making disciplined infrastructure investment as you continue to see with growing our customer base selling more and we're doing it while creating happier customers.
We continue to invest in our infrastructure and capabilities to drive and fuel our growth.
A friction less an inspiring customer experience from research to living without product has been a priority for us and we have seen our customer satisfaction scores significantly increase year over year.
It has been led in particular by improvements in fulfillment and all digital experience, which has been a key focus for us this year.
The fulfillment customer satisfaction increased in quarter two of over 500 basis points versus last year with a cheese disarm inventory levels return to the weeks of stock that we have been targeting.
We have been delivering all of this to our customers faster than naphtha and as you are aware our business model is advantage vis vis our competitors.
Evergreen inventory and only 1% of all inventory that is aging, but she is a world class.
The increased customer satisfaction of fulfillment improvement was also driven by a commitment to making disciplined investments in infrastructure.
Investments in supply chain around does this finding quaking with them that they have allowed us to remain on a strong yes appropriate position.
This up well to deliver a very strong back half with all while continuing to reduce the impact of tariffs on goods from China have had on our business and maintaining a best in class delivery time with.
We're pleased to see ever since the pre claims on lead times for manufacturing in Ocean transportation.
Might some U S port delays of inbound trucking volatile, let's say and we all see container pricing is coming down from the historic levels, although not yet so 2019, right and we will see the associated benefits in fiscal 'twenty for.
As Sean said, we achieved the strong close to I'm beyond fiscal 'twenty four.
Our accelerating growth investments this year in three key areas.
First is increasing our distribution capacity by adding one PC 12, 40 C network to support our future growth.
This facility is expected to be operational at the end of quarter four and our team has already started to work on this and we will begin to realize the associated expenses in quarter. Three this D. C will increase our distribution capacity by approximately 15% and enable us to improve lead times and customer satisfaction.
The second is accelerating supply chain technology investments, including a transportation management and order management system.
And you saw that we continue to drive customer satisfaction and manage the growing scale of our business.
And certainly we will be investing in capabilities and talent.
Then ill expertise and technology, including a new Pos system I mentioned earlier. These investments are critical for us to continue our overall growth trajectory with the operational efficiencies required to deliver that.
So in summary, we're very pleased with our financial and operational performance during quarter. Two we will continue to invest in high ROI marketing and advertising, which has been a key contributor to our brand awareness grows in overall adult.
We will continue to build off of operational capabilities to drive our future growth and ensure that we can continue to scale with excellent.
We are proud of our results and the outperformance to the category, which is being driven by compelling value proposition Saddam designed for life business model off that.
As we look to the back half of the game, we will continue to drive exceptional execution of the entire loves that team as we navigate the dynamic operating environment and we remain committed to our growth initiatives financial controls and operational excellence.
Drive market share gains and strong financial returns.
I will now pass the call over to Donald to review our closer to result in a few details related to our fiscal 'twenty three outlook.
Yeah.
Thank you Mary and good morning, everyone. I will begin my remarks with a review of our second quarter results and then provide a framework for how we are approaching the remainder of fiscal 2023.
Net sales increased $46 $1 million or 45% to $148 $5 million in the second quarter of fiscal 2023 a.
The year over year net sales increase was driven by growth across all channels showroom net sales increased $29 8 million or 47, 7% and $92 $4 million in the second quarter of fiscal 2023.
This increase was due in large part to a comparable sales increase of $19 $9 million or 36, 8% to.
The $74 million in the second quarter of fiscal 2023, which is compared to $54 $1 million in the prior year period.
This increase was principally related to higher point of sales transactions and slightly higher promotional discounting strong promotional campaigns.
And the addition of 35, new showrooms 14, kiosks and to mobile concierge as compared to the prior year period.
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 sales made directly to customers through our ecommerce channel increased $6 $1 million or 25% to $35 5 million in the second quarter of fiscal 2023 as compared to $29 5 million in the prior year period with the increase principally driven by.
The strong performance of our promotional campaigns.
Other net sales, which principally includes pop up shop shop in shop, and BARDA inventory transactions increased $10.2 million or 98, 3% to $26 million in the second quarter of fiscal 2023, as compared to $10 $4 million in the prior.
Period.
The increase was primarily driven by a pull forward of planned open box returned inventory transactions with icon our inventory BARDA partner.
As a reminder, our inventory transactions with icon are part of our CTC DFL and ESG initiatives, where we repurposed returned open box inventory in exchange for BD of credits, which are being used to support our advertising initiatives to create brand awareness and drive net sales growth.
Additionally, we expand or a best buy shop in shops by 18 locations, bringing the total count to 22 locations.
These increases were partially offset by a shift in programming coupled with lower productivity of our temporary online pop up shops on Costco dot com compared to the prior year period.
By product category, our sectional net sales increased 53, 1% our other category net sales, which includes decorative pillows blankets and other accessories increased 35, 6% over the prior year period.
Due to the shifts in our Sac promotional activity.
Net sales decreased 15, 4% in the second quarter, but has increased 15, 8% over the prior year six month period.
We exceeded the second quarter net sales guidance, we shared with you on our last call primarily driven by the success of our father's day and July 4th promotional campaigns. In addition to increased warehouse throughput even with increased demand.
We also accelerated the majority of our full year projected return box inventory transactions to provide us additional space for normal growth and inventory levels prior to the holiday season.
The decrease in gross margin rate of 310 basis points over the prior year period was driven primarily by an increase of approximately 440 basis points in total freight costs, which includes inbound and outbound freight tariff expenses and warehousing costs.
These costs were partially offset by an improvement of 130 basis points in product margin, principally driven by a one time vendor rebate related to currency impact and lower promotional discounting and vendor negotiations to assist with the mitigation of tariffs.
Our gross margin percent exceeded our guidance driven primarily by lower inbound freight costs than we have projected as a result of less than projected volume of inbound containers received during the second quarter, which is shifting these costs, but the third quarter and a slight benefit to the inbound freight rates.
We had projected.
We do anticipate freight rates to continue to decrease over the remainder of fiscal 2023, but because of the amount of inventory we maintain on hand to support customer satisfaction of the brand we will not see the full benefit of the drop in these rates as compared to the prior year until the associated inventory you sold beginning late Q4.
<unk> through the first half of fiscal 'twenty 'twenty four.
Yeah.
The 38, 1% year over year increase in SG&A was largely driven by an increase in employment cost due to new hires and variable compensation overhead expenses and an increase in rent expense related to the addition of 51 touch points and higher percentage rent related to the touch point net sales increase.
He is.
Overhead expenses increased due to infrastructure investments and selling related expenses, principally due to the credit card fees related to the net sales increase.
SG&A expense as a percent of net sales decreased by 160 basis points due to higher leverage within rent infrastructure investments equity based compensation insurance and selling related expenses, partially offset by travel unemployment cost.
The deleverage in certain expenses relate to the continuous investments, we are making into the business to support the ongoing growth.
Advertising and marketing expenses increased $6 1 million or 46, 4% to $19 1 million in the second quarter of fiscal 2023 as compared to $13 million in the prior year period. As a result of continued investments in marketing spend and awareness campaigns to support our sales growth.
Advertising and marketing expenses were 12, 9% of net sales in the second quarter of fiscal 2023 as compared to $12 seven per segment net sales in the prior year period.
The slight increase in basis points was due to an increase in media spend to support our net sales growth.
Depreciation and amortization expense increased $1 $5 million from the prior year period to $3 $1 million principally related to the current year capital investments for new and remodeled showrooms.
Operating income was $9 $9 million compared to $9 million in the second quarter of last year driven by the factors just discussed.
Net interest income of $3000 for the second quarter was a both prior year's second quarter expense of $46000.
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 early today.
Net income was $7 1 million or 45 cents per diluted share in the second quarter of fiscal 2023 compared to net income of $8 4 million or 52 cents per diluted share in the prior year period.
During the second quarter of fiscal 2023, the company recorded $2 $8 million for provision of income taxes as compared to $500000 for the second quarter of fiscal 2022.
The increase in income taxes is primarily driven by the increase in the effective tax rate to 28% in the second quarter of fiscal 2023 from five 8% in the second quarter of fiscal 2022.
This is due to fiscal 2022, having the benefit of the release of the valuation allowances on the company's net deferred assets.
The valuation allowance was fully released as of the end of fiscal year 2022.
We generated adjusted EBITDA of $14 $1 million in the second quarter of fiscal 2023, as compared to $12 $4 million in the prior year period.
Adjusted EBITDA rate exceeded expectations, driven by the higher gross margin percent, partially offset by an increase in SG&A related to the increase in net sales as well as a conscious decision to re prioritize spend from the second half of the fiscal year, such as advertising and marketing and increased investment.
Surrounding supply chain technology, including our new Pos system and resources to support the continued growth of the business.
Turning to our balance sheet.
Inventory increased 95% year over year, and we feel very good about both the quality and the quantity of our inventory or.
Our evergreen in stock inventory is a competitive advantage and is not comprised of seasonal merchandise. Therefore, we do not run the risk of being overstocked or having to be promotional to reduce inventory levels.
Our inventory levels are in line with our annual projections and our goal to support our growth and maintain industry, leading in stock positions with nearly half of the increase in year over year, ending balance sheet inventory costs related to increased freight.
The increase in inbound freight costs reflect the impact of the continued global supply chain situation we.
We expect that the rate of year over year increase in our total inventory balance will moderate by year end.
We ended the second quarter with $17 $7 million of cash and cash equivalents and $36 million in availability on our revolving line of credit with no borrowings.
Please refer to our earnings press release for other details on our second quarter fiscal 2023 financial performance.
Regarding our outlook, we continue to operate 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 guidance, but will provide you a framework for how we're approaching fiscal 2023.
For fiscal 'twenty, three we reiterate what we shared with you on our first quarter earnings call, which was more than 25 planned showroom openings and continued infrastructure investments.
To support the substantial multi year growth opportunity that lies ahead.
Even with all of the headwinds the furniture category is experiencing our competitive product advantage and in stock inventory position provides us the confidence to reiterate the net sales and gross margin framework for the year that we shared on our first quarter earnings call.
In a scenario where net sales growth for the fiscal year is in the previously discussed low 30% range.
Third quarter and fourth quarter net sales growth would be approximately 15% and 23% respectively.
Expected moderation in sales growth rate in Q3 from the levels. We just reported is principally related to increased throughput and acceleration of returned open box inventory transactions in Q2, representing approximately $9 $5 million in net sales as discussed earlier.
We continue to expect gross margin rate to be approximately 300 basis points below fiscal 2022.
Decline is expected to be approximately 574 basis points in Q3, and 40 basis points in Q4 over the prior year quarters.
In Q3, we are estimating an increase in total freight cost over the prior year of approximately 400 basis points, primarily related to higher outbound last mile fuel surcharges and higher inbound freight costs incurred in the first half of fiscal 2023 as compared to the prior year.
As a reminder, inbound freight costs were capitalized in inventory and amortized through the P&L based on projected weeks of supply of inventory. This aligns the cost of the inbound freight to when the inventory is sold.
Product margin is also estimated to decline by approximately 174 basis points related to higher promotional discounts the prior year period.
As Shawn and Mary mentioned, we have re prioritized and accelerated certain infrastructure spend around supply chain technology and resources to support our strategic growth roadmap.
As a result of this re prioritization, while adjusted EBITDA for fiscal 2023 is projected to grow in dollars over the prior year, we expect adjusted EBITDA margin rate decreased slightly by approximately 100 basis points for fiscal 2023.
Q3 is projected to decrease approximately 210 basis points in Q4 is projected to increase approximately 735 basis points over the prior year quarters.
The Q3 decrease is related to the gross margin and incremental infrastructure investments discussed, which principally impact third quarter adjusted EBITDA margin rate.
The increase in Q4 over prior year is due to expected leverage at the operating expenses with the seasonally higher sales volumes and higher sales growth rate.
So in conclusion, we are pleased with our second quarter fiscal 2023 results that exceeded our expectations from a net sales and operating profit perspective.
Fight the challenging macro environment, our team continued to execute against our growth strategies and operate the business with discipline.
We are confident in our positioning for the second half of the year and we will continue to capitalize on the attractive opportunities, we see for growth and market share gains.
With that we would now like to turn the call back to the operator, who can open it up for questions operator.
Thank you at this time, we'll be conducting a question and answer session. If you'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 you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing.
The star keys in the interest of time, we ask that you each keep to one question and one follow up thank you.
Our first question comes from the line of Thomas Forte with D. A Davidson. Please proceed with your question.
Great. Thanks. So one question one follow up and I'll get back in the queue times. Many so first offshoring married Ana Jack Congrats on an amazing quarter once again.
First question is you mentioned a few times in your prepared remarks, Sean what is designed for life made a love Sac and why is that such a competitive differentiator.
Yeah.
And for life is our.
Design strategy, it's how we can see both products and circle to consumer in a nutshell is how we can see the services married to those products.
And our focus is to develop long term products.
Long term services programs policies to develop long term relationships customer so.
It has become our entire business strategy to put it bluntly and we see it is totally unique in the marketplace because so much of it.
Sumer Ism in any category is driven by Temporize products meant to do.
Disintegrate and and compel us to buy new ones and so while we do believe we have some razor razorblade aspects of this business that we're very excited to exploit their drive repeat business that drives loyalty and youre seeing that unfold sexual triangles cover sectional accessories, accoutrement et cetera et cetera.
We will also utilize these philosophies to achieved the same kind of results in other adjacent categories throughout the home.
We don't just throw ourselves into new categories.
Rapidly because we tried to do them designed them to this level and that takes time, but the results are are the kind of results that you've seen us now put up for years and years. When you have dominant solutions and so to us. It really is everything and we're proud of the result.
And we're proud to represent that ethos, which of course.
And the outcome as we see it as true sustainability.
Excellent Alright, and then for my follow up well.
Well it seems hard to believe you sell a product that's even better than your sectional.
My opinion released their stock Tech zone system, how much revenue could you generate from that product in maturity and how does the gross margin compare against actuals and facts.
Yes, I think the easiest way to characterize that because we have not broken out sales in stealth tech as as its own product line.
Is to say broadly look in just the next few years, we will do hundreds of millions from sales and yourself Tech.
Right. This is not just a little accessory little add on to make fractionals.
Cute spell check from our point of view is the best home theater system in the market place today.
And I'm very proud of it I live with it myself and I am blown away nicely by the experience I get to have on a stealth tech embedded fractionals, which by the way are my 15 year old sectional pieces that I've added staff Tech too, which is emblematic of our designed for life philosophy in action right, we don't just making.
Thing and then tell you you should have waited and bought the newest thing right that that is that it's so unique the way that we we put things forward and so still check is our most recent invention. The most recent embodiment of a design for life product and it is.
So much fun. If you know if if you haven't if you're following loves that can have an experienced it. It's critical that you experience. It cause there and that's why we have showrooms by the way. So it really pays off our whole business model. This is a product that cannot be understood certainly not on this call certainly not even from the website on its face you you.
Have to experience it in person so grateful to see it often running grateful that we've had you know little to no warranty issues are.
Any meaningful kind of niche, it's we feel feel very proud of the launch and expect big things from it.
Wonderful I'll get back in the queue time permitting for additional questions. Thank you.
Thank you. Our next question comes from the line of Brian Nagel with Oppenheimer and company. Please proceed with your question.
Hi, good morning.
Or do you want to add my congrats on a nice quarter.
Good morning.
Got a couple of questions and I apologize I didn't get them both people shorter term in nature, but first off I was Sean in your opening comments you mentioned.
The commentary you made last quarter about maybe some softness at the low end of that.
Got it abating here a bit so I was wondering if you can just add a little more color on there. So we can understand better like that piece of your business and the trajectory in the business and then my second question Donna with regard to the different the framework you outlined for the balance of the year.
Especially with the Q2 Q3 piece is what you the framework you outlined for Q3.
Is that consistent with what Youre seeing now.
I guess, it's almost halfway through the quarter. Thanks.
Yeah, oftentimes a quarter, we'll begin a.
The timing of a quarter, maybe begin with some kind of moments like for instance, Q3 begins with labor day, and we get a quick read on labor day and that that's all we have necessarily to shape the outlook for our quarter Q2. Similarly.
E.
Just from a few weeks in our Reed was soft we were transparent about that and then as you can see from results.
Wasn't just soft as maybe.
Uh huh.
We had we had feared it maybe come in so I don't I think Mary Mary You May you May have Eric Jack you may have any other specific observations from the shape of the quarter.
Different promos with him, but that's essentially what would happen.
Yeah, Brian just to add to Sean's point.
We had a really successful father's day since the July four.
So that's obviously what you see in the resolve sudden and obviously gave US continued confidence in how much the brand is resonating.
And you know the success that we see going forward. So I think it's always the danger kind of giving too much detail within the quarter you know in the end.
We can in a month because it's just always so much that we're moving around and programming and being very agile, but we were obviously very pleased with quarter, two and and feel very confident going into quarter. Three you don't know what can you share a bit about some of the shifts that actually came into quarter, two which means that that.
Quarter, three oversee what's giving you that frame up a week. So very good about the balance of the year and that and actually feel that you know great strength, particularly around our.
So that kind of a spring and all the excitement that Sean talked about hopefully at the gift of the season.
And so forth so what wasn't great inventory position in a great position with the field hiring et cetera are we all set to go and feel good for the rest of the year.
Oh, no I didn't know if there's anything you want to add on.
Right, So Brian Yeah.
Yeah, that's what both John and Mary had said we have a very good line of sight. We believe into how Q3 is going to shape up and although it may look on the lower end you know at the guidance that I provided for Q3 at a 15% rate I think it's important to note Mary had just said too we had.
A couple of things that.
We were able to pull forward consciously pull forward into Q2, and if you take some of that into consideration that $9 $5 million between increased throughput.
And accelerating our open box transactions with icon you can see that Q3 would be in line with what we're projecting for Q4 as well closer to a 23% rate, but as you know.
We we try to bake in as much conservatism on the other side as well because you just never know, but right now we believe we have a pretty good line of sight into our Q3 performance.
Alright I appreciate it thank you.
Thank you. Our next question comes from the line of Alex Furman with Craig Hallum Capital Group. Please proceed with your question.
Hey, guys. Thanks, very much for taking my question and congratulations on another really strong quarter I wanted to ask about the additional investments that you're making and and you know it sounds like that's the primary reason for our EBITDA margin outlook being a little bit lower for this year can you talk.
A little bit about how much these projects are going to cost and what the timeframe is for them I would imagine that are putting together a new distribution center is it is something that would likely go.
Go into next year, if not if not mostly next year or so should we expect and I know, it's obviously wait wait you seem to be talking about numbers for next year, but just in terms of the you know the impact that these investments are going to have on next year should we continue to expect our investment of some of your EBITDA margin in the first half of next year entities and.
If you did then and just wondering kind of what the what the timing of some of these investments will be.
Yeah, Great Alex. Thank you for the question. So we're always focused obviously in two horizons the year and then kind of a forward view in our strategic plan and during the summer as we were reviewing with them all of our leaders you know it became very clear to us that.
Based on our continued growth rate that we needed to accelerate the investments publicly that I had laid out.
As that as you rightly said for example, the additional D C. But also in terms of our talent and capabilities in critical infrastructure that really will help us to be able to drive the growth through FY 'twenty four and beyond.
You know for US you know, making bold moves that really belief you know sets us up for that continued growth. This is something that we are all aligned to Paul as he said obviously some of the call that you know really bad in this year when it around the D C and frankly also the heavy lift because you.
What compelled you know putting systems in place the processes that have to be done and there is more of a heavy that that's that and then when we kind of come to thinking through on the FY 'twenty full framework are you know won't see we'll factor that in but for a you know it is more of a heavy Alaska.
But this year in order for us to be setup. So we'll share more at the end of the year, but that you know for us that we feel good at based on you know taking mountain is now and that seems very excited because that you know, we really do need to give them that infrastructural support.
Yeah.
Okay. That's really helpful. Thank you and then just a follow up on the new distribution Center.
Obviously, you're taking your inventory up here and the business is growing very fast at the same time can you give us a sense of kind of what your your peak ability to handle inventory is now prior to the new distribution center or is it something that you think youre going to be needing very quickly.
Yeah, I mean, we we have the ability to sell to deliver P. Can more this year you know parts of bringing in the new D. C is actually to be able to sort of you know customers in the south at a prophecy does as I shared with you before we're so happy to see that fulfillment customer.
It's actually really jump up this year. So it's as much around Jay you know geographic proximity to customers as well as the capacity that obviously I laid out.
Before so we don't see any constraints for the shares but we certainly see that it's needed you know as we go into next year and and now is the time for us to start to build in that capacity and frankly, but you know these things don't always come up so easily. So it was also important it was perfect.
Right right. So the model. So it was almost about that being able to look back then so what you know a bit of both from that side Alex.
Okay. That's really helpful. Thank you very much.
Thank you.
Thank you. Our next question comes from line of Matt Koranda with Roth Capital. Please proceed with your question.
Hey, guys. Good morning, just wanted.
I wanted to clarify the quarter to date trend that you guys had discussed earlier in the Q&A.
Just wanted to put a finer point on it or are we tracking.
Quarter to date up 15% in line with the Q3 guidance I'm just curious if you could maybe comment on how the consumer responded to the labor day sale.
How you are factoring in the broader promotional environment and the industry into the Q3 and Q4 outlook.
Yeah, Hey, Matt.
Thank you for the question so yeah quarter to date, including Labor day, we feel really good about the frame might garner shed.
And and feels strong around outperformance, we continue to grow and are well ahead of the category taking market share though.
You know what we saw through a quota to you know there's always that ebbs and flows dropped but we feel really good as to where we stand right now and it's almost that you know we always also manage all frameworks with conservatism baked in because you know well with full throttle on driving gross there was obviously the macro dynamic.
That we all read and see all the time and whilst we continue to grow we have the best performance in the category are you now in that.
We're seeding a widening gap in outperformance to the category, that's just strengthening more and more so what you know we we feel good and even if you think of just closer to the three year geometric stacks up 215%. You know this just is continuing to build from.
From that side, so nothing other than confident through quarter, three and into quarter four and the rest of the year.
Yeah.
Okay, Great and then just on <unk> I wanted to see if we could get a little bit more detail on product adoption there.
Pork quantifiable metrics, you can share around attach rates to <unk> and I'm curious maybe I'm sure on spreads.
How is this helping with marketing efficiency because some of our checks seem to indicate word of mouth on sectional is a pretty big driver of store traffic.
And just wanted to see how that threads into sort of the marketing efficiency that you're saying.
Yeah.
Yeah, we have not broken out stop talking and talked about attachment rates were you know broadly I'll, just say that you know they're on target.
They are moving according to plan a given that we have.
It's been in market for less than a year and it's a huge leap from.
Being seen not any more just isn't being bad company and not even as a couch company, but as a home electronics company.
Electronics brand with our brand on the side of these home electronics products. You know that's a huge brand lead for us it's going to take years to come to maturity. The good news is it's off and running and making a making a meaningful impact.
On the performance of our marketing I think the clearest example is any any television commercial which is a massive port a portion of our advertising spend.
Shows self check with sectional. So I think we've spent over 40 million already to date roughly on stealth tech related commercial I mean this is a.
Something we are materially behind you and and thankfully, we're seeing material success.
Success with it in terms of word of mouth no no doubt about it I mean this is a product that is quite remarkable and I think that's probably the most misunderstood and.
Mrs.
Under appreciated aspect of websites now why why why are we winning why why is word of mouth. So strong for us why are our marketing rois, so high quarter after quarter for years now.
So the product is remarkable.
You know in a landscape, where most products you know they're good brands out there there are beautiful design, but they're not remarkable they don't cause people to talk about it.
Mark.
And that's what's beautiful about self check in so it absolutely is is buoying up.
And improving our marketing rois on word of mouth.
At a time when of course actuals, we're just coming into their own and finally, becoming part of the mainstream we hope and being adopted at a at a broad right and so yeah still tech do you have a long long runway to come to maturity. We believe it is a big business line for US we think of home audio as a category we're competing in.
This is again not just icing on the cake for Fractionals and by the way we will leverage this.
<unk> Tec sub brand.
In other categories as we eventually expand the brand that way, so sorry to not give more color, but given that it's a new category and we step into.
The granular renovation of our public data very carefully and thoughtfully that is our approach thus far it's only been married one.
One thing to add to that John is I think with our work with it's amazing to get that kind of word of mouth, but if you think about the model a lot of that is driving the top of the funnel and also making the middle and bottom of the funnel easier to convert and I think as you.
As you see what Mary discussed and the marketing team is doing is a lot of hyper local targeting that's the power of word of mouth and our advertising, helping the top of funnel, enabling us to get really closer in.
And in creating higher conversion rates, which what which is what we're seeing and we're super the thing. We're also seeing as our own ability to drive around traffic outside of what we would call. These classic holidays. So.
We're seeing the signs were more of a word of mouth, driven destination brand and we have a lot of control over our future and we feel great about it.
Okay.
Excellent guys appreciate all the detail I'll jump back in queue.
Okay.
Thank you. Our next question comes from the line of Maria reps with Canaccord Genuity. Please proceed with your question.
Oh, great. Thanks, so much for taking my questions.
Just following up on the last question and sort of strong referrals driving incremental demand for you can you just maybe talk about how you're thinking about balancing that with marketing investments and the environment of broadly softening consumer demand wishes the backdrop of you gaining share.
Yeah.
Yeah, Hey, Maria it's Mary. Thank you Yeah, I mean, obviously you know Iraq, great success as he talked about with strong referrals word of mouth and so forth. It's just basketball assurance been talking around just people love our products every when we talk about it's not just that they like it you know it's functionally re.
You know all products. So I think as we look at our you know everything we're doing around marketing whether it be investing in T V or as Jack said much more kind of local hyper targeted program.
All of it is is really just continuing to strengthen the funnel from the top to the bus or as we look at the latest brand health.
They were just seeing conversion higher than ever.
Especially from consideration through to purchase and and those Rois are stronger and it's all just a key strength for us around the brand stickiness and that's just more and more people know us and as we put yourself in their local area Wow, you get that kind of double down in terms of just people starting to.
Talk about us coming in and trying it and frankly sell tickets created an amazing dynamic in the showrooms.
You know that really brings it beyond just that you know thinking about coming in for furniture eight crore.
The whole family moments in and a lot of excitement. So you know we will continue to be very agile adjusting you know I think I talked a bit about testing and learning and marketing around social media and so forth. You know, we'll just continue to do that and the team did a great job. There you know that always adjusting real time in terms of whether thing the hour.
Our life and and you know we have a very disciplined approach.
Every dollar we spend and so you know more to continue to build on that brand stickiness continues to increase.
Got it thanks, Mary and then secondly on staff that can you maybe talk about if you're seeing more traction and conversion of what's still stuck in the bathroom.
<unk>, sorry, a shop in shop locations relative to other customer touch points.
Yeah, No. That's a great question. Thank you yes.
Passive obviously, our excitement for best buy partnership is the strength of both Tech and you know, we're seeing double the rate of attachment and bestbuy shop in shops, and you know and that continues to build and accelerate so you know for us that's a lot of WAC and seamless.
Going to look for home audio so we all that front town center and as I said with you in the last quarter.
So for next year and beyond we will continue to expand our partnership with best buy and play a very strong role in the home audio market.
With what we see is the number one product you know for every family in America to be able to have access to.
Got it that's very helpful. Thank you so much.
Thank you.
Thank you, ladies and gentlemen that concludes our time allowed for questions I'll turn the floor back to Mr. Nelson for any final comments.
Thank you to all of the <unk> family and all of our Associates partners and investors, who continue to support the company and we appreciate it look forward to speaking with you next time.
Yeah.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.