Q3 2023 Lovesac Co Earnings Call
Greetings and welcome to the Love Sac third quarter 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 Ms. Rachel Schacter of ICR. Thank you you may begin.
Thank you good morning, everyone with me on the call is Shawn Nelson Chief Executive Officer, Mary Fox, President and Chief operating Officer, and Donna download Chief Financial Officer before we get started I would like to remind you that some of the information discussed will include forward looking statements regarding future events and our future financial performance.
These include statements about our future expectations financial projections, and our plans and prospects.
Actual results may differ materially from those set forth in such statements.
For a discussion of these risks and uncertainties you should review the company's filings with the SEC, which includes today's press release.
You should not rely on our forward looking statements as predictions of future events.
All forward looking statements that we make on this call are based on assumptions and beliefs as of today and we undertake no obligation to update them, except as required by applicable law.
Our discussion today will include non-GAAP financial measures, including EBITDA and adjusted EBITDA. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. A reconciliation of the most directly comparable GAAP financial measure to such non-GAAP financial measure has been.
Provided as supplemental financial information in our press release.
Now I'd like to turn the call over to Shawn Nelson Chief Executive officer of the ones that company.
Thank you Rachel good morning, everyone and thank you for joining us today I will start by reviewing the highlights of our third quarter fiscal 2023 performance and then discuss loves shaq strong positioning within the industry.
Then marry Fox, our President and C. O O will update you on the progress we've made against our strategic initiatives this quarter and finally, Donna <unk>, our CFO will review, our financial results and a few other items relating to our outlook in more detail Jack.
Jack Crouse Chief strategy Officer is also on the ground to participate in the Q&A session.
During the third quarter the industry backdrop remains challenging given the significant inflationary pressures the U S consumer is facing.
We observed that the furniture category overall is down of late in the mid teens percent wise versus last year.
Despite this operating environment, we again delivered strong results against tough comparisons from a record setting Q3 last year and remember our performance represents a real time pulse on demand the actual facts and stealth tax products almost always ship out just days from order placement.
Fedex common carrier as opposed to long unwinding backlogs that sometimes bolster other home furnishing competitors sales.
With more than 210 physical locations, mostly in shopping malls. We are currently in the midst of our largest quarter from a sales and profitability and cash flow perspective.
We are projecting to end this fiscal year with over $75 million in total liquidity, which includes cash cash equivalents and availability under our line of credit.
We have a strong debt free balance sheet that is fit to weather any further macro disruptions that may arise into next year.
Our continued outperformance and market share gains are a testament to our differentiated business model, including our value proposition and patented innovation design for life platform Foundation of sustainability, inflicting brand awareness and consumer adoption with an industry leading in stock position.
We see our in stock position.
And our inventory itself is a huge competitive advantage.
Our inventory is not seasonal and is designed intentionally to carry little to no fashion risk is primarily made up of just a few key evergreen skus.
Factional and all of our newest invention, but on the platform are the antithesis of obsolescence, even self check as a recent add on was designed to be reverse compatible with all the actuals pieces ever sold over the past decade or so.
Our high in stock levels have allowed us to gain significant market share and increase customer satisfaction by delivering to the consumer rapidly before during and after the pandemic as well.
As we allow our inventory levels to rationalize naturally through the peak of this holiday season happening right now and on into next year, we are seeing working capital become a source of positive cash flow.
As I've said before our addressable opportunity is significant at $46 2 billion for the couch plus home audio Tam, which combined with the fragmentation of the market presents a very attractive and long runway for our growth and share gains as we continue to innovate.
Right.
Broadening our opportunity in these categories and new ones to come.
Now let me review the highlights of our third quarter performance total net sales were $134 8 million up 15, 5% versus the prior year period we.
We delivered total comparable sales growth of eight 9% with broad based strength from both new and existing customers.
And adjusted EBITDA loss of $8 4 million was better than our expectations for the quarter driven by the better than planned gross margin declines.
We believe that Q3 represented the toughest comparisons we have faced to date or will face for the balance of this fiscal year.
We're very proud of these results, especially considering the delta they represent versus the overall furniture category, which is down in the mid teens of late user.
Using that as a baseline comparison really emphasizes the resiliency of our business model and our brand, which we have been building very strategically for years now we are generating real time demand for our superior products, even in this challenging macro backdrop.
A full 38% of recent customers report not cross shopping their sectional purchase against any other competitor whatsoever.
This is a sign of the growing power of our reputation and a true demand for this brand.
This product.
Over and above customers just shopping the market place for yourself.
Our results are also evidence of the depth and nimble execution of the entire loves that team who are working tirelessly to remain agile in this choppy environment. We are proud of the culture of excellence we are building together.
We continue to be very disciplined on the cost side, while still investing across the business in support of our growth initiatives.
Coming off four years up nearly 50% growth rates head count growth has always lagged so with all hiring it loves shaq now mostly frozen out of an abundance of caution our cost model needs no drastic rationalization to what is now a sizable revenue base.
Last quarter I discussed the importance of technology supply chain and our focus on ensuring that we are building the necessary infrastructure to support our multi year growth runway.
Accordingly, we were thrilled to announce the hiring of John Legg as our chief supply chain officer.
John's vast industry knowledge leadership experience and vision will play a fundamental role in building best in class supply chain operation, but loves shaq he.
He will continue to enhance our world class supply chain network, which supports our unparalleled customer experience design for life products.
And circle to consumer philosophy.
Mary will give you an update on the broad based progress we are making on our growth initiatives. So I want to shift gears to what we are focused on as we close out the year and look into next year.
Looking ahead based on current performance quarter to date, we are confident in our positioning for the all important holiday season.
We are seeing notable cost relief, especially on the inbound freight side and we're starting to see some of that benefit come through in Q4 with most of the benefit expected to be realized next fiscal year. However, the much discussed inflationary pressures across key cost items continue to impact our overall cost base with labor as.
Notable example, we continued to deployed levers to help offset some of these inflationary pressures even as we remain very surgical in terms of any price actions.
There's levers include adjusting promotional campaigns and managing our merchandising and mix across our channels, which the team has done really well to date as reflected in our results there.
They also include tight expense management and careful prioritization of spend to ensure we are investing in the most critical areas to solidify our foundation for growth.
As we look beyond Q4 and into next year, while we are not ready to provide guidance.
I do want to share some context for how we are approaching next year.
We expect the macro backdrop to remain challenging.
In such an environment. We believe we will continue to significantly outperform our category and generate growth.
But at a more modest rate versus this year overall.
Even in a recessionary environment. We believe we can continue to deliver sales growth supported by our planned showroom growth.
Our highly differentiated products that are bolstered by years of consistent brand advertising as well as the strides we're making across our initiatives.
And of course, our innovation agenda I don't want to divulge more on this last point just yet, but we are excited about our future and confident in our ability to compete and expand.
The past three to four years of rapid growth that we have delivered has been driven in a large part by rapid increases in dollar spend.
And the planned and focused marketing in fact, our marketing spend has gone from 9.2 million spent back in 2018 to 71 million total spend projected this fiscal year or a CAGR of about 53%. It is likely the largest folks.
Spend in the subcategory of couches in the marketplace.
The long tail benefits of this compounding marketing spend has generated significant awareness for our brand momentum and demand for <unk> Tec ongoing.
It will continue to underpin our expected growth.
We have demonstrated and expect to continue to improve customer satisfaction and brand affinity.
Improvements in process and service levels.
Affect the customer experience, even while aggressively taking market share and outperforming the category.
We are about to issue our second annual ESG report with more fulsome disclosures.
And we will relentlessly pursue progress in all key ESG areas.
We leverage our designed for life philosophy to bring more sustained hyphen, a bowl of products to market at scale, which can make a huge impact on our carbon footprint. These are products that can actually sustain.
<unk> built to last a lifetime and designed to evolve with the user. We believe this approach to sustainability is totally unique to love Sac and will ultimately position us as the leader in this realm.
We have already repurposed more than 115 9 million plastic bottles to date converting them to our <unk> and Sac upholstery fabric, which is made from 100% recycled inputs and we are now committed to our goal of diverting more than a billion plastic bottles from the waste stream.
We are making progress toward our stated goals of achieving zero waste the real emissions by 'twenty four.
We believe we can become a significantly larger multibillion dollar company over the longer term and we see a real incredible path to getting there.
In order to realize these ambitions, we will continue to invest in innovation and R&D.
While scaling our infrastructure cautiously even in this challenged macro environment, our core business generates strong profitability, which is not fully apparent in our P&L as we are in this investment mode right now.
We have a strong debt free balance sheet and a model that we are confident can deliver continued relative outperformance even with a recessionary backdrop, we will stay disciplined on the cost front controlling what we can control without jeopardizing our ability to capitalize on the growth opportunity. We have our focus was on generating long term share.
Holder value.
And positioning this business to realize and maximize this open ended growth opportunity, even as we responsibly manage the business with great discipline.
Finally, I want to thank the entire loves that team for their tireless execution of our strategy and delivery of our goals.
Our disruptive model enables us to continue to grow thrive and innovate and invest in this business at a time when many other companies are scrambling for cash and even experiencing D growth.
I could not be prouder of this amazing team, we've built and with our continued success sounds exciting growth opportunities for all who are a part of this hashtag loves Act family.
With that said I will hand, it over to Mary to cover our strategic priorities and progress.
Mary.
Thank you, Sean and good morning, everyone. Our quarter three results marked a record third quarter for our company and our demand price, that's 22% outpaced our revenue growth, which is in sharp contrast to the category decline that's showing that our performance was significantly stronger than any of our key competitors.
Well it was primarily driven by the delayed shipments from previous quarters.
We are extremely proud of the outstanding woman and using fiscal 'twenty 'twenty as a baseline all three of them of course that is 146%.
This demonstrates a significant market share gains we have experienced over the last three years and more and we estimate that no other brand with a significant market share in the category has kept pace with Alfred.
It's really that same time period, our position in the market have grown so much calendar is being a market share leader in the categories. They compete in the ability to be the market leader across all categories is testament to our focus on inventing and designing a product platform with products that will deliver value for our consumer.
And creating an experience and ecosystem.
Around that platform.
Evergreen inventory position and operational focus has driven our customer satisfaction scores to record level.
All brand experience continues to delight, our customers, which in turn accelerate our flywheel of demand with word of mouth thing on number one the one that.
We are uniquely positioned to continue to profitably takes that even through the current market dynamic I will now provide highlights on our strategic initiatives.
Talking with Wanda product innovation, we continue to be pleased with the progress itself Tech, which is a game changer for RA and the Catholic waste from an innovation standpoint, the brand continues to gain share and we believe the brand has the ability to generate hundreds of millions annually a lot that can be a market leader.
And here are some key highlights.
We continue to see attachment rate increase as the year progresses as adoption continues to grow on a sequential basis.
Yesterday, she knows that was sold with cells that have an average order value close to $9000 or nearly three times the average national average order values.
The success of the launch and the sequential progress. We are seeing provides us reassurance that the launch support and products continue to build relevance and appeal along with a strong lever to grow our customer lifetime value.
Also during this call. So we continue to innovate with unique product collaboration that all customers now.
Including Disney's very successful recent released at the whole cookbook to movie and our partnership with Alice and Olivia launch two New York fashion week in September , which delivered a billion impressions Joey and coverage.
Number two omnichannel experience and of course, it free as part of our continuous improvement of the customer Omnichannel journey, we re launched our website configuration experience the new configuration with design for combination of listening to our customers and building the most intuitive path to purchase and see.
Think more technology by introducing augmented reality.
We also improved the only kind of expand mine coal, placing some of the best practices from all touch points.
Lars do they were seeing some very compelling results and some highlights all from grants.
Brian Cashman rates of up to 400 basis points from higher margin products, such as stealth Tech and Thursday.
And all digital satisfaction scores have increased by 350 basis points.
Yesterday, prelaunch and all conversion has increased.
Then with the new configuration.
As the year has progressed, we have accelerated our plans opening pace of touch points as we continue to see a high return on capital. There's a payback period of around one yet we believe we can penetrate significantly more markets than our competitors driven by our category, leading productivity I'll touch point that what we'll do.
Drive a long term strategic advantage as consumers continue to show that preference.
Makes sense all product as part of that path to purchase.
We are continuing to drive improvement some touch points economics, as we can build on our brand strength to drive traffic.
I think in Q3 grew 34% to last year, which significantly outpaced U S traffic trend as reported by symptomatic.
This strength, coupled with our real estate strategy has allowed us to deliver lower occupancy cost, which bodes well for the already strong four wall contribution of all touch points.
As we continue to focus on delivering a best in class Omni channel experience.
Three we launched a new campaign P. O S system pilot in partnership with predict spring predict spring is a world class P. O S spend that that aligns with our objective of leveraging technology to increase transaction efficiency.
This manual reconciliation and set the foundation for our continued growth and learnings will be applied to an expanded pilots in early fiscal 'twenty four.
In Q3, we leaned into attending to Cosco without physical road shows and saw some really terrific success and cautiously we are priced at over 60 physical road shows that have productivity in line with the pre COVID-19 level and we have seen the productivity increases all teams get used to selling and the kafka environment.
Lastly, customer satisfaction performance, we continued to experience tremendous improvements in I'll see that as a focus on digital and post purchase as a priority driving is really gaining traction. These gains are critical as we know that our number one source of all purchases or awareness comes from word of mouth and as we can.
Creates a more satisfied customer base, we expect to be able to continue to leverage word of mouth.
A third initiative ecosystem. The vision for this is rooted in what they can see them I think to think and the development of an ecosystem for our customers and products. So I think optimal value for our customers and so that design for life product platform, they've invested and we know this to be true for our biggest brand.
We have continued to see encouraging sign that our costs.
Has already leaning into generating more value for themselves by folding that brand platform to better suit their lives as they change. This dynamic is unique to us in all category and illustrated by a recent customer metrics, where there's a full asset 10 transactions in quarter three from repeat customers.
Complementary Tau strong word of mouth marketing mix continues to drive best in class category growth performance on our brand health metrics continue to strengthen.
And of course, the three we continue to see our overall marketing performance trending within all protection and we are still seeing outsized demand growth to our marketing spend.
Oh customer lifetime value and acquisition cost ratios remained strong and our ability to be nimble by closely monitoring programs and shifting spend has allowed us to be efficient and conversion poker.
For example, SMS marketing has been performing extremely well as a last click conversion tactic and we lead the industry in all Kpis for opening conversion rate. This tactic is very strong during key events with love click sales improvements of over 200% to last yet left.
Bridging the things of our business model is we are agnostic to where our sales take place.
So spend is focused on driving omni channel sales and we are very successful in converting throughout the funnel and allowing us to drive sales.
The customer goes.
And then I'll final initiative, making disciplined infrastructure investments as I said I think close to three O customer satisfaction was at the highest level. We have meshed in one key contributor. This is our ability to deliver completed orders quickly to our customers, which is enabled by the investments, we're making in our infrastructure and culture.
I had said our infrastructure problems and we successfully opened our fifth DC in the Dallas Fort worth area at the end of the quarter ahead of schedule and will be fully at scale by the end of the fourth quarter. This additional DC investments enables us to continue to deliver our growth as well as benefit from last mile savings as we operate.
To our customers in the south.
Our supply chain is advantaged by a focused number of skus that are not also exposed to being obsolete due to seasonality.
This means we can carry inventory and confidence that we will sell through it and tenants to all the changes in demand.
We have industry, leading delivery times to our customers in mid days in a cautious way will record in stock levels of 98%.
We have been strengthening our supply chain capability to deliver strong unit economics, driven by our productivity Luca focused assortment breadth and scale efficiencies.
As well as optimizing inventory through the planned implementation.
I'm thrilled that John Legg, our new Chief supply chain officer will be leading this work and we expect to see these benefits starting in fiscal 'twenty four and beyond.
No well said, we've also started to see significant inbound freight reductions over the last quarter.
Well mainly flow through to our P&L in fiscal 'twenty four.
So in summary, we are very proud of our financial and operational performance during quarter three as we look to closing out the year. We will continue to focus on our product omnichannel experience and ecosystem to deliver the best experience and product finally for all consumers.
By the end of this year, we plan to have doubled our business in just two years.
And I wanted to thank our team for all that great work to deliver these results.
We will continue to invest to drive off road as well as leverage our scale for efficiencies and savings.
We are proud of our outperformance to the category, which is being driven by our compelling value proposition that ought to sign for life business model office, we will continue to play offense.
Agile controlling what we can and delivering a great customer experience.
I'll now pass the call if it's still honest with you our quarter three results and a few details relating to our fiscal 'twenty 'twenty three outlook.
Sure.
Thank you Mary and good morning, everyone. I will begin my remarks with a review of our third quarter results and then provide guidance for the remainder of fiscal 2023.
We are pleased with our third quarter results net sales increased $18 1 million or 15, 5% to $134 8 million in the third quarter of fiscal 2023 with a year over year increase driven by growth in the retail and other channels.
Silver them net sales increased $13 3 million or 19% to $83 million in the third quarter of fiscal 2023.
This increase was due in large part to a comparable net sales increase of $10 4 million or 18, 5% to $66 4 million in the third quarter of fiscal 2023 compared to $56 1 million in the prior year period related to higher point of sales transactions.
Even by strong promotional campaigns and the addition of 41, new showrooms and 13 new kiosks.
As a reminder point of sale transactions represents orders placed through our showrooms, which does not always reflect the point at which control transfers to the customer and when net sales are recorded.
Other net sales, which include pop up shop stop and shop, and barter inventory transactions increased $7 1 million or 61, 8% to $18 5 million in the third quarter of fiscal 2023 as compared to $11 4 million in the prior year period.
The increase was driven largely by continued planned open box returned inventory transactions with icon, our inventory BARDA partner, the reintroduction of Costco physical pop up shops that were put on hold during fiscal 2021 because of Covid shutdowns.
And the addition of 17, new best buy shop in shops, we now operate 22 best buy shop in shop locations.
As a reminder, our inventory transactions with icon are part of our C. T. C. D. S L and ESG initiatives. We repurpose returned open box inventory in exchange for media credits, which are being used to support our advertising initiatives to create brand awareness and drive net sales growth.
Internet that sells sales made directly to customers through our ecommerce channel decreased $2 2 million or six 3% to $33 3 million in the third quarter of fiscal 2023 as compared to 35.5 million in the prior year period as we continue to see some.
Shifting back to in person shopping in.
Internet net sales have increased 11% over the prior year nine month period.
By product category, our sectional next sales increased 18, 9% and our other category net sales, which includes decorative pillows blankets and other accessories increased 36, 5% over the prior year period.
Due to shifts in our Sac promotional activity back net sales decreased 11, 6% in the third quarter, but has increased 4% over the prior year nine month period.
The decrease in gross margin rate of 300 basis points over the prior year period was driven by an increase of approximately 160 basis points in total freight costs, which includes inbound and outbound freight tariff expenses and warehousing costs.
And 140 basis point decrease in product margin driven by higher planned promotional activity.
Our gross margin rate exceeded our guidance driven primarily by lower inbound freight costs and realization of the lower freight rate benefits through the P&L earlier than we had projected partially offset by a slightly lower product margin rate.
We do anticipate inbound freight rates to stabilize at this level for 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 to the P&L of the drop in these rates as compared to prior year until the associated inventory is sold.
During late Q4, and continuing through the first half of fiscal 'twenty 'twenty four.
The 48% year over year increase in SG&A was largely driven by an increase in employment cost due to new hires and variable compensation and increase in rent expense related to the addition of 54, new touch points and higher percent rent related to the touch point net sales increase.
Overhead expenses increased due to infrastructure investment such as technology and professional fees and selling related expenses, principally due to credit card fees related to the net sales increase.
SG&A expense as a percent of net sales increased by 720 basis points, which was primarily due to planned deleverage unemployment cost.
Infrastructure investments rent selling related expenses travel and insurance, partially offset by higher leverage and equity based compensation.
The deleverage in certain expenses relate to the continuous investments, we're making into the business to support our ongoing growth.
Advertising and marketing expenses increased $3 2 million or 23% to $19 1 million for the third quarter of fiscal 2023 as compared to $15 8 million in the prior year period.
Advertising and marketing expenses were 14, 1% of net sales in the third quarter of fiscal 2023 as compared to 13, 6% of net sales in the prior year period.
The increase in advertising and marketing as a percentage of net sales is primarily due to an increase in media spending to support our third quarter and projected fourth quarter net sales growth.
As a reminder, advertising and marketing investments benefit multiple fiscal periods.
Depreciation and amortization increased $700000 from the prior year to $2 5 million principally related to capital investments for new and remodeled showrooms.
The operating loss for the quarter was $11 6 million compared to operating income of $3 million in the third quarter of last year driven by the factors just discussed.
Net interest expense of $68000 for the third quarter was slightly higher than the prior year period related to unused line of credit fees that increased due to the increase in our revolving line of credit earlier this year.
Before we turn our attention to net loss net loss 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 loss for the quarter was $8 4 million or 55 cents per diluted share compared to net income of $2 8 million or 17 cents per diluted share in the prior year period.
During the third quarter of fiscal 2023, the company recorded a $3 2 million income tax benefit related to the operating loss for the quarter as compared to a $200000 income tax provision for the third quarter of fiscal 2022.
The effective tax rate increased to 27, 8% in the third quarter of fiscal 2023 from the five 9% in the prior year period. This is due to fiscal 2022 having the benefit of the release of the valuation allowances on the company's net deferred tax assets.
<unk> allowance was fully released as of the end of fiscal 2022.
We had an adjusted EBITDA loss of $8 3 million in the third quarter of fiscal 2023 as compared to an adjusted EBITDA income of $5 8 million in the prior year period adjusted.
Adjusted EBITDA for the third quarter was ahead of our expectations driven by the better than planned gross margin declines discussed earlier.
Turning to our balance sheet.
Our inventory levels are in line with our projections inventory increased 63% year over year, and we feel very good about both the quality and the quantity of our inventory.
Our evergreen in stock inventory as a competitive advantage and as it is not comprised of seasonal merchandize, 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 goals to maintain industry, leading in stock positions and delivery times.
As we move into fiscal 'twenty 'twenty four we see the opportunity for inventory levels to moderate as we see inbound freight relief and our recent technology investments enable us to programmatically allocate inventory more efficiently.
We ended the third quarter with $3 8 million in cash and cash equivalents and $36 million in availability on our revolving line of credit with no borrowings.
This reflects the timing of our inventory investments and the seasonality of our net sales profitability and cash generation.
The fourth quarter of our fiscal year will be and has always been the quarter that generates the most significant cash flow from operations for the fiscal year and as a result, we currently have and we expect to end the fiscal year with total cash cash equivalents and availability under our line of credit in excess of 75.
$5 million.
Please refer to our earnings press release for other details on the third quarter of fiscal year 'twenty 'twenty three financial performance.
Regarding our outlook, we continue to operate in a dynamic environment with wider range of potential outcomes as it relates to the fourth quarter.
As a result, our outlook assumes net sales growth over the prior year will range from high single digits to the mid teens range.
While we are tracking to the high end of this range quarter to date, we still have huge volume holiday weeks ahead of us and believe it is prudent to factor in some variability in our guidance.
We expect to continue to see the benefit of lower inbound freight costs flowing through the P&L with the greatest benefit of these lower costs being most impactful to gross margin in fiscal 'twenty 'twenty four.
In the fourth quarter gross margin is expected to be up modestly approximately 115 basis points from the prior year period due to lower inbound freight expense that is expected to more than offset higher promotional discounting warehousing costs and outbound last mile fuel surcharges.
We expect adjusted EBITDA margin rate to increase approximately 325 basis points year over year in the fourth quarter of fiscal 2023.
The increase in Q4 over the previous year is due to the gross margin rate increase and expected leverage of total operating expenses with the seasonality higher net sales volumes.
So in conclusion, we are quite pleased with our third quarter fiscal 2023 results. Despite the challenging macro environment. Our team continues to execute against our growth strategies and operate the business with discipline.
We are confident in our positioning for the all important fourth quarter of the year, which drives the most significant amount of net sales profits and operating cash flow.
We will continue to capitalize on the attractive opportunities, we see for long term 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 into question Kim.
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 starkey.
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 Maria reps with Canaccord Genuity. Please proceed with your question.
Good morning, and thanks for taking my questions. So you talked about the category being down and it seems like the Q4 guide is a little bit softer versus your prior outlook is there anything you can maybe share about sort of consumer sentiment today are you seeing any customer instead of deferring a purchase decision and then maybe more broadly how are you thinking about the impact.
High interest rates and so tight housing market on demand and then I have a quick follow up.
Good morning, Maria. Thank you for your question. So I think honestly, if we see a full you know as you told us that the category down that started earlier this year, we've continued to outperform.
The Castor bean actually are based on our latest numbers, we're seeing a wider gap to our performance and as you can see you know as you look at it.
On a shed you know we're tracking at the higher end of our guidance and have obviously factored in some variability in terms of you know what we're seeing for you know consumer shift or some changes I think as everybody has reported were seeing more promotions in the <unk>.
Great. So we've responded to that which is all time, then but they are much more benign to the pre pandemic level.
Demand is a bit choppy S. So for US as an example, black Friday was super strong.
And then Saturday and Sunday, Okay, and then cyber Monday was really strong and as we see that you know shoppers are holding out thinking that there'll be stronger promotions.
So from that side. So you know the the shape and the timing of our fourth quarter. You know we've planned for we feel very good based on where we're tracking at the high end of our guidance. We have record quote pipeline. So you're just looking at the teams. Even this morning is so strong.
Long and with the strong promotional cadence you know the marketing investments that Sean talked about we feel very good to deliver Astana shad with all guidance I think in terms of any other shifts within 30 minutes or so the second part of your question in General we're seeing obviously, a little bit of a mix shift but that truly is.
Again to the channel mix shift.
As a bit of a movement back to touch points versus last year, but as you know last year was really driven in quarter three by some broader post COVID-19 dynamics.
Within the consumer purchasing at the mid to light large purchase sizes, and obviously with the stuff that we see that being very strong a little bit of shift to financing.
But really nothing around sensitivity to discounts on the lower end, we are seeing some trends with smaller pet. She says that they are having a high conversion went on promotion. So very similar married to obviously, what everyone else is seeing but no. Other shifts I'm you know, we think but obviously the good news is all co can see them as very affluent.
And that we have a great plan and that we will continue to follow through for cortisol.
Got it that's very helpful. And then maybe you touched on this a little bit, but maybe can you expand a little bit on the extent of your promotional efforts. This holiday season relative to competitors and maybe the broader retail environment or even prior holiday periods.
Yeah, I mean, I think so for us as we look at the promotions that we plan a.
We have a little bit more frequency and a little bit more of that from the black Friday and cyber Monday, but left the that we're seeing with other competitive because frankly, our brand strength is so good and as we think about you know just the growth that we've had and that the brand stickiness, we don't need to.
Two to expand that and I think as Sean talked about and I think it's 38% of our most recent customers. They don't even cross shop with anybody they just want to come to us and they come a build out of a feedback close with US and then as we think about some marketing investments and show them shed you know we've got.
Great alignment around the key big weeks through the rest of this year a.
Very efficient and effective and I think I should add a couple of years with you around the S. M. S. N example, but just others and the team have already agile and they keep on adjusting so we actually feel very good about what is planned through the rest of the quota.
Great. Thanks, a lot and good luck with the holiday season.
Thank you Maria.
Thank you. Our next question comes from the line of Thomas Forte with D. A Davidson. Please proceed with your question.
Great. So first off congrats on the quarter a second for my first question Shaun you've been very thoughtful.
Cool.
And very.
Experience when it comes to supply chain.
I'm very interested right now in the role of China now.
Not just from us but for the industry.
And I'd love to hear your thoughts on what you're thinking about them for the next five years and how China will play a role in your supply chain, how rest of world will play a role and how much progress do you intend to make on shortening the distance between where your products made.
And where your products consumed.
Yeah, Tom Thanks for the question, we as you know have been very vigilant in trying to.
Diversify our supply chain, it's been a strength of the.
It's it's continues to underpin our success in different ways and madness manifest itself in different ways as the world evolves.
At this moment China.
So luxury wine three years ago, maybe China was nearly 100% of our represented 100% of our overseas production.
90% of our overall production and today, you know that's down somewhere below 30% and we have redundancy for almost all of the products that we make there. So we've we make a like for like <unk> in Vietnam and Indonesia.
I'm, sorry, and yeah, and Malaysia and <unk>.
Our point of view is that the world the world and the global supply chains continue to become a more.
More fractious than we want to have more diversity. So we're pursuing are again redundant supply chain.
Manufacturing opportunities in North America.
In Mexico actively.
And we you know we're focused on the longer term.
Of being more vertical even if even if not owned.
And a more sustainable manufacturing stuff using more sustainable inputs closer to the consumer delivering over shorter distances lower carbon footprint with of course, the caveat that we believe that.
Point of view can be done less expensively, you know and bring our gross margins up overtime I mean that we we we not only believe that but we have reason to believe that that will be the outcome. So all we view all of these it's just a step.
To that end all these moves that we're making is a step in that direction and you know we think that as much as China's been a great supply chain for in many realms.
We're all watching the same news, we all believe that there's there could be risk there and we've seen of late through Covid. The what happens when there are shocks to the supply chain. So our focus is on bolstering you know creating.
Creating a strong business with diversity of supply chain redundant manufacturing and I think we've done a good job of that so far and we hope to be ahead of that curve as that curve continues to present itself in real time.
Ultimately the most difficult piece in this category will be fabric.
You may be familiar with you know China's supply chain and mills is extremely strong.
Thankfully, we've made great headway in Mexico, and North America, and discovering new sources for fabrics.
That can give us the redundancy needed to be prepared for anything and also of course to continue to focus on our first product costs.
Bringing costs down driving gross margins up even if we finally begin to recover from all of the supply chain headwinds in the form of inbound freight et cetera.
Weighed on those realms of our business and many others.
So you know I appreciate the question and the opportunity to discuss this is something that again, we will we're proud to be focused on them and hopefully ahead of the curve on.
Excellent and then for my follow up question, you talked about the opportunity for gross margin improvement next fiscal year on a better freight so at a high level.
How should we think about your planned use of the higher gross profit.
The extensive human engage in more promotional activity or more marketing or to the extent to let more flow through to the bottom line or just can you talk about at a high level.
Good morning.
So yeah. So yeah. We were we are planning to see some gross margin expansion out of our lower freight rates next year. There's a couple of things that we're looking at although we're not going to guide to next year, where we are there as we as part of its going to be used to mitigate some of the higher outbound freight cost that Ed.
Everybody is experiencing through the Fedex and the U P. S. The world higher we are going we are projecting to see some higher warehousing costs, just as a relative to the increase in labor costs at our three pls.
So a piece of that will be used to mitigate that and we will be investing a portion back into the business next year as we continue to say that we we still have some foundational infrastructure investments, we we need.
And we do anticipate a portion of that gross margin expansion to flow through to the bottom line, but you know we're going to navigate that you know us we're extremely agile and we're going to navigate that and allow as much as we think we can flow to the bottom line next year as we go.
Navigate through the year. So we have there is use of that gross margin expansion, but.
But we will continue to operate the way that we always are and very fiscally responsible and agile. We believe we have a lot of opportunity next year.
Great. Thanks for taking my questions.
Thank you. Our next question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your question.
Hi, This is Andrew Chazanoff on for Brian Nagel.
Wanted to start off I congratulate you guys on another great quarter.
My first question is in regards to just the sales in the period on the Q2 call you discussed the potential pull forward for about nine and a half million cells.
Can you discuss any other drivers to the Q3 sales slowdown and then my follow up question will just be a follow up to the first question on the outlook for the balance of the year can you discuss some of the drivers do you expected slowdowns in any dynamics that may have changed since you laid out prior guidance for low 20% growth for Q4. Thank you.
Hey, Good morning, Andrew Mary. Thank you for your question and I'll take the first part in terms of sales did you reference we had discussed last quarter. There was about nine and a half million of revenue that was pulled.
For some of the increased throughput and some was the open box inventory that we talked about and then obviously as I said in my remarks full quota three walked out revenue without 15 and a half.
If you factored in for that pull forward of revenue really is at 24%.
And slightly ahead of all let's say the strength that we saw in our total demand for the quarter at 22%, which we see as being the strongest growth in revenue compared to anyone else that has recently reported off from that side. So you know you see that continuation in performance.
And then obviously one of the key benefit for US is our Omnichannel model. So we really are able to respond to where our customers want to go for sale, so whether it be more in person or whether it be online we're agnostic to whether fails you know will be from that side.
And then I think Don do you want to talk through on quarter fall in terms of the guidance, but if that profile.
Yeah sure. So the guidance that we're providing for Q4 as far as being high single digits mid teens range is that growth is coming out of the additional comp showroom sales non comp showroom cells. We're at.
Costco pop up shops, which we didn't have this time last year.
We're adding there so the Costco roadshows perform a deep Dotcom Road show performance is coming through stronger than we've seen in prior periods and.
And we do have the addition of the additional best buy shop in shops that we did not have this year.
As far as the decrease in the guidance that we provided for the year on our second quarter earnings call. You know we are experienced but at a lot lesser impact what do you see other retailers are so again, what Mary said, what what Sean had said we are very very happy with it.
Performance of.
Of our our net sales volume of our associates and you know still coming through even if you use the mid range of the high single digits to mid teens, you know that indicates a approximately a 26% year over year growth rate, which is very very strong for our category.
This year.
Thank you so much.
Thank you. Our next question comes from the line of Matt Koranda with Roth Capital Partners. Please proceed with your question.
Hey, guys good.
Good morning, I'm, just really quickly on the fourth quarter trends that you mentioned.
I think you said you're tracking.
Toward the higher end of the fourth quarter guidance on the top line.
I wanted to confirm that that's what we've seen specifically quarter to date in terms of year over year growth and then just any spikes.
Or trends within the Black Friday, cyber Monday period to call out.
Hey, good morning, math I think.
Thank you said the question. So yes, as we said we are tracking at the high end of the range and that and have seen really good strength as we think about for example, black Friday that you asked about very strong you know the weekend with a little bit softer, but still growing and then cyber Monday was strong.
And actually what's really thing good is that kind of the days following cyber Monday have also been really strong. So I think similar to what you've heard from others I think comparing to last year is that is not a great comparison, because everybody bought early on because they were concerned about inventory.
Is that just the whole shape of the quarter was a little bit different and with thing trying to bang demand that just keeps on coming in I think on top of promotional cadence.
We have some tougher comparisons in December for example, and even a bit into January plus very strong marketing campaigns are we feel good.
For you know, where we're going to land in the oversea continued to lead.
The category in outperformance map.
Okay very helpful. And then I guess that begs a follow up which is.
Why why have a sort of on the low end of mid single digits guide for the top line for the quarter, just given that you've tracked towards the mid teens quarter to date, and then comparisons seem to get easier as we move through the quarter just given that the cadence that you mentioned I guess I'm, just curious like sort of.
Why.
What would drive you guys down towards that lower end of the guide does that assume some sort of cigna.
Significant macro deterioration what are the assumptions embedded in that lower end of the guide that'd be helpful.
It's the the conservatism right I think everybody knows us to be extremely conservative, but and that's why we called out that although we are providing that range, we are trending quarter to date.
Even through yesterday are absolutely to the higher range, but you never know what could happen macro wise right. So we thought it would be very prudent to build a range in there. Although again, we're trending to the higher side and you know is to always build some type of conservatism.
So our modeling and that's why we elected to provide that range, where there's no indicators to US right now that we should be coming in at that lower end and again, our our performance is extremely strong and it continues to be every single day as we monitor our you know our demand volume so.
Again, it's it's purely baked out of conservatism and some variability as to what macro impacts could happen.
As we finish up the fourth quarter and that's the only reason we provided that low end of the guidance.
Okay very helpful. Thanks for that then I'll jump back in queue.
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 I wanted to ask about stealth tack that that was a very.
Crescive number you gave about the initial purchase price being about three times, what you see for a typical first time vaccinal purchase can you give us a little bit more insight into how are those those transactions are stacking up or are they typically more pieces than you would see.
He bought an initial national purchase or more premium covers and then just as you're kind of looking at what you've seen in the last couple of months in the overall category slowing down I'm curious if you've seen any sort of resistance to stealth tech as well or if that's been a more more of you given give.
The high price point.
Great. Thank you Alex and that's a good question you know our passion for self check in and obviously you had earlier.
The continued momentum so I think in terms of your first question around so you know that the average order value and obviously being so much higher.
To you know transactions without South Tech you know, we see that both in terms of casinos just love the experience I mean, you know you've been to show rabies has an experienced and had a spell check it's amazing so.
The showrooms are doing an incredible job of Demoing it and that's one of the great successes of our business model.
And consumers are loving and buying interest and actually as I said, we continue to see stealth attack builds month over month and are very happy to see the performance end and even picked up a bestbuy you know we are significantly advantaged with cell type performance that.
More than double what we see for the rest of the fleet. So just shows us the potential as well from outside in terms of what else are we seeing in the dynamics of the purchase we're seeing you know bake setup put shifted.
You know not really seeing any shifts in terms of what people are buying around cover we are seeing a bit of a trend up in terms of the more premium fell as you know love soft which was country to where we were early in the year, where we saw a bit more of a shift to stand up so everything really continues to show us with all affluent customer base.
They come to love back to to buy our product because they love it.
Generally you know foreign tenant multi from cross shopping because they just buy into the design for life product platform and the ability to flex and change to your life. So.
So you know we continue to feel very good about our house self tech will build and it's only a year.
We should have actually so I'm happy birthday to it its a youthful they built a lot of campaign success and we will continue to build and it shouldnt always talks about for many years in what we see as a market leading innovation.
Great. That's really helpful. Thank you very much.
My pleasure Thank you Alex.
Thank you. Our final question. This morning comes from the line of Vermont Williams with Stifel. Please proceed with your question.
Hi, good morning.
Just kind of in general how are you thinking about the promotional.
Cadence.
But you're going to Miss we employ going forward as we see the promotional landscape getting more intense with inventory levels coming back how do you anticipate.
We anticipate offering promotions. If you looked like you picked up a little bit in terms of the level of discount, but how do you kind of view that going forward at a high level and secondly.
How are you thinking about kind of the number of distribution of openings.
For next fiscal year.
Yeah, how about I'll take the first question on promo cadence and then we can flip it about a question for next year. So obviously, it's everybody's reported there has been an uptick in promotions.
But obviously that was up against plastic wherever it was incredibly benign and even said this year. It is a very benign to pre pandemic levels. So so we feel good in terms of what we have seen and as we have been testing with the team's agility, sometimes you know our customers the rest.
Pumping as much to find out the thing as they ought to depth of promotion. So you know everything that we're saying is that we won't need to be more aggressive with everything we know today we've.
We've got strong promotional campaigns, but also coupled with the.
The marketing campaigns that we are driving to a SMS as an example, just a great conversion tactic that really enables us to be top of mind for our customers. So if palms in we've plugged it into our guidance and and obviously feel good to adjust.
If we need to but everything we see today, we think that we have the right plan to.
To close out the quarter and have a very strong year.
I don't know Tom if you want to talk about FY 'twenty four.
Yeah.
As far as promotional cadence.
We are I I, we're not planning to be any more promotional or have any more promotional activity any specific promotional activity and what we're looking at next year again, we're not providing any type of formal guidance for next year I can just tell you on the plan.
That we're building internally Oh, we have a lot of opportunity next year.
Which will not require us to be any more promotional between the add on of additional showrooms the expansion of best buy shop in shops, the expansion of Costco.
In person pop up shops.
And some other really exciting thing is we have next going on next year that I believe Sean briefly alluded to but not really in his script earlier today. So a lot of opportunity next year, which will we don't plan to have to be any more promotional.
To still drive some strong very very strong topline growth next year.
Yeah.
Okay, great. Thank you.
Thank you ladies and gentlemen, this concludes our question and answer session I'll turn the floor back to Mr. Nelson for any final comments.
Yes, just wanted to say thank you so much to the amazing loves that team that has built a company putting up some of the highest growth in the category for the year as we round out the year in this critical fourth quarter.
Appreciate all of the hard work and effort I appreciate our investors for continuing to support us and looking forward to a bright new year as we get through the fourth quarter.
Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.