Q4 2023 Lovesac Co Earnings Call

Speaker 1: I person.

Speaker 2: to Lovesack Fourth Quarter Fiscal 2023 Earnings Conference 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 0 on your telephone keypad.

Speaker 2: Please note this conference is being recorded. I will now turn the conference over to Rachel Schachter of ICR. Thank you. You may begin. Because this program is being recorded and you do not have to watch this from the outside.

Speaker 3: With me on the call is Shawn Nelson, Chief Executive Officer, Mary Fox, President and Chief Operating Officer, and Donna Delamo, 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.

Speaker 3: and our future financial performance.

Speaker 3: These include statements about our future expectations, financial projections, and our plans and prospects. The end.

Speaker 3: Actual results may differ materially from those set forth in such statements.

Speaker 3: For 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 projections of future events.

Speaker 3: 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.

Speaker 3: Our discussion today will include non-GAAP financial measures, including EBITDA and adjusted EBITDA. These non-GAAP measures should be considered in addition to you and not as a substitute for or in isolation from our GAAP results.

Speaker 3: A reconciliation of the most directly comparable GAAP financial measure to such a 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 LUBSTEP company. Hi, this is Shawn Nelson, Chief Executive Officer of the LUBSTEP company.

Speaker 4: Thank you, Rachel. Good morning, everyone, and thank you for joining us to review our record results for fiscal 2023 and to discuss our outlook and plans for fiscal year 2024, which is already underway.

Speaker 4: I will begin by sharing a high-level overview of both. Then, Mary Fox, our President and COO, will discuss our key growth initiatives for Fiscal 2024. I will begin by sharing a high-level overview of both.

Speaker 4: Finally, Donna Delimo, our CFO , will review our financial results and a few other items related to our outlook in more detail.

Speaker 4: Starting with our fourth quarter and fiscal 2023 performance.

Speaker 4: We put up record results for the fourth quarter and for the full year building on our long track record of outperforming the industry and driving share gains.

Speaker 4: For the quarter, we delivered sales growth of 21.7% and adjusted EBITDA growth of 51%, both ahead of the outlook we shared on our Q3 call.

Speaker 4: For the year, we generated a total annual net sales increase of 30.8% to $651.5 million, total omnicomp sales growth of 21.9%, and an adjusted EBITDOT earnings increase of 8.7% and at $ spirit.

Speaker 4: to 60.4 million.

Speaker 4: We ended the year with total liquidity of $79.5 million, which includes cash of $43.5 million and availability on our line of credit.

Speaker 4: Notably, our strong debt-free balance sheet positions us well to navigate a difficult macro backdrop. This is a quick overview of the

Speaker 4: To put perspective on the significance of these results, fiscal 2023 was a challenging year for the furniture industry given the macro pressures facing the consumer. As of year end, our data sources showed the home category overall to be down 16% versus the prior year. In contrast, our full year sales increased 30.8%.

Speaker 4: indicating meaningful market share gains.

Speaker 4: More importantly, these industry-leading sales results were achieved by converting real-time demand as we typically ship just days after an order is placed.

Speaker 4: We never had any meaningful backlog inflating our revenue results.

Speaker 4: We also contend with inflation across our cost base to varying degrees.

Speaker 4: Additionally, we were up against the record financial results that were delivered in fiscal 2022 and 2021 stacked.

Speaker 4: Our strong financial and operational results continue to be reflective of our unique competitive and operational advantages across our people, brand, business model, and operating platform.

Speaker 4: Lovesack is a sustained growth story with a four-year net sales kegger of 40.8% and four-year adjusted EBITDA kegger of 105%.

Speaker 4: Shifting gears back to FY 23 full year results.

Speaker 4: We are very proud of our accomplishments for the year, which were driven by our unique omnichannel business model centered around our infinity flywheel, where success drives more success.

Speaker 4: Our Infinity Flywheel allows us to do business differently and consistently outperform the category in which we operate. In a nutshell, it goes like this.

Speaker 4: Customers see our highly advantaged, high ticket, proprietary products via advertising of every kind. They seek to experience it in one of our various branded physical touch points.

Speaker 4: Configure it online or in showroom if they research.

Speaker 4: Invest in it because Design for Life products are so long-lasting and investable.

Speaker 4: in it because design for life products are so long lasting and investable. Evolve and upgrade it.

Speaker 4: to drive lifetime value because Design for Life products uniquely facilitate this kind of repeat behavior. And finally, they advocated actively because their experience with the product and our brand was so good. Thanks to the investments we've continued to make that improve our customer experience model ongoing.

Speaker 4: This then drives more people to see us again, which starts the process all over again and further drives the flywheel.

Speaker 4: Mary will expand on each note of this flywheel, sharing specific results to validate it, and our plans to enhance it further through the investment for our future we have made of late and continue to make, even as we hold ourselves accountable to produce meaningful profits.

Speaker 4: In terms of our outlook for FY24, we expect the macro backdrop to remain challenging as elevated inflation and higher interest rates drive a more cautious consumer and put pressure on the high ticket, more discretionary home category overall.

Speaker 4: We are highly cautious operationally in this environment. We are controlling expenses very tightly in every realm in the name of efficiency.

Speaker 4: We also expect to realize significant benefits from amortization of last year's inbound freight costs. This will drive up gross margins beginning in Q2 especially and serve as a partial offset to known SG&A increases year over year.

Speaker 4: The net result will be EPS growth.

Speaker 4: We will continue to make surgical investments in our future because we believe very strongly in the TAM headroom for the seating and home audio categories, where we have less than 2% penetration and the massive total available markets that await in adjacent categories not yet announced, which will leverage our highly competitive design for life approach.

Speaker 4: Recent investments begin to pay back as soon as the second half of this year in expected results from a key product launch in the Satchnall family of products.

Speaker 4: We have a schedule for physical touchpoint expansion and product launches that will drive reliable sales growth with positive cash flows for another year of strong market share gains versus broader decelerating category.

Speaker 4: We have a schedule for physical touchpoint expansion and product launches that will drive reliable sales growth with positive cash flows for another year of strong market share gains versus broader decelerating category. China will provide more detail on guidance.

Speaker 4: This is a continuation of a multi-year trend for Lovesack.

Speaker 4: We greatly outperform our category, and this further strengthens the infinity flywheel effect spoken of.

Speaker 4: At Lovesack, we are maniacally focused on the long term because we are convinced that our business model has tremendous potential for continued high margin revenue growth in our current categories, adjacent categories, and related services.

Speaker 4: Because of our differentiated approach, these opportunities are unique to us.

Speaker 4: We make very long-term design for life products. We pair these with long-term focused programs, policies, and services that will eventually be monetized. We make very long-term focused programs that will eventually be monetized.

Speaker 4: The intended result is long-term relationships with customers, a brand that people just love.

Speaker 4: Our pursuit of this long-term vision is relentless and sustained. We view the need to run a very disciplined, efficient, cash-generating business right now in this challenged macro environment so that we may unlock our promising future.

Speaker 4: This means preserving cash, managing expenses tightly, and being surgical with investments, but investing nonetheless. We are willing to be this disciplined because we can be patient, looking forward to the expanding opportunity ahead.

Speaker 4: Management is 100 percent committed to this way of thinking. This is a big part of what we mean when we speak of sustainability.

Speaker 4: products that can actually sustain and a pragmatic cash generating business that can actually sustain.

Speaker 4: sustainability in all its forms is our greatest passion.

Speaker 4: its form is our greatest passion. So in summary,

Speaker 4: It was a strong end to another great year at Lovesack. We made important strides against each of our strategic growth initiatives and made good progress strengthening our foundation to support the long runway of growth still ahead. We are already more than six times the size we were at IPO in 2018, cash generative in the year ahead and profitable ongoing.

Speaker 4: Even with significant headwinds contemplated, we are braced for a choppy macro backdrop and will continue to execute with discipline, willing to adjust to changing conditions and deliver bottom line results as we grow and drive long-term value for all stakeholders.

Speaker 4: Before turning the call over to Mary, I want to thank the entire Lovesack team for all they accomplished in fiscal 2023 while navigating much uncertainty. We have a great team and a culture that exudes the sentiment inferred by our timeless ticker symbol.

Speaker 4: both at our hubs and on the front lines and in all our various touch points. We are so thankful for their discipline and commitment and generally cool disposition. We look forward to building on our success in fiscal 2024. With that, I will hand it over to Mary to cover our strategic priorities and progress. Mary?

Speaker 5: Thank you, Sean, and good morning, everyone. We are pleased with our strong end to fiscal year as we delivered record results in fiscal 23, even in a difficult operating environment. As Sean shared, our net sales growth in fiscal 23 has been increasing.

Speaker 5: was 30.8% and using fiscal 29 as a baseline our four-year demand comp stack is up 293%. Every year since then we have delivered profitable growth with a four-year net sales CAGR of 40.8% and a four-year adjusted EBITDA CAGR of 105.5%.

Speaker 6: anyone else.

Speaker 5: A few highlights of our unique infinity flywheel include, firstly, we compete in a large addressable market of over $46 billion, with 48% of households having an annual income of over $75,000 per year. We have the number one best-selling couch in America.

Speaker 5: We continue to take market share every year, and yet we've barely scratched the surface of this huge and fragmented category.

Speaker 5: Customers love our Design for Life brand and product platform and they tell their friends and family this, which has resulted in word of mouth becoming our number one awareness driver. 38% of our customers report that they don't even cross shop with any other brand.

Speaker 5: Second highlight, our brand health is stronger than ever with innovation that is changing the landscape of the home. This is exemplified by our marketing ROIs which continue to be very strong. In addition, the innovation of StealthTech has helped us to continue to have incredibly efficient marketing. Our Mode nowWhy it On't on't On't With Chase

Speaker 5: with a customer lifetime value, customer acquisition cost ratio of over 5 that is unsurpassed.

Speaker 5: This in turn enables us to continue to drive sales with market-leading levels of investment.

Speaker 5: Thirdly, we have best-in-class touchpoint economics second only to Apple and Tiffany, with incredible payback periods under a year and four times the sales per foot productivity of our competitors.

Speaker 5: We continue to see improvements in our new showroom ramp-up rate, which gives us additional confidence in our ability to expand penetration with our touchpoint expansion plan.

Speaker 5: And finally, our advantage supply chain delivers orders to our customers in a matter of days with Evergreen inventory. This results in customer satisfaction of over 84%, increasing customer loyalty and the strengths of our Infiniti flywheel.

Speaker 5: We are uniquely positioned to continue to profitably take market share, even through the current market dynamics that Sean discussed. As you are aware, we run our business with a strong focus on growth and an ROI-driven investment discipline. As demonstrated by our results in fiscal 23 and before, we will continue to grow ahead of the industry, fueled by disciplined investments.

Speaker 5: continues to gain share, and we believe we have merely scratched the surface with respect to its potential, which we believe will grow past $100 million and more in annual sales in the future.

Speaker 5: The fiscal 23 sectionals that were sold with StealthTech had an average order value close to $8,500 or nearly three times the average sectional average order value.

Speaker 5: Total transactions for factionals with StealthTech included were over $100 million for fiscal 23 and building throughout the year. As we have shared, looking out to the next two to three years, we have planned new product launches for each year and in the second half of fiscal 24, we have planned a new product

Speaker 5: we will launch a significant innovation that will further open up the aperture of our share in the couch category. We look forward to sharing more details with you closer to the launch date.

Speaker 5: Looking ahead in terms of product innovation, we are excited about our innovation agenda. We are consistently adding to our product portfolio and thus expanding our addressable TAM from SACS, the SACCHIONAL, to home entertainment with StealthTech and more to come where home needs tech. www.sarc compromise.com

Speaker 5: We are focused on unlocking the future runway with disruptive design-for-life innovations planned steadily over the next 10 years, some in new product categories.

Speaker 5: Secondly, our omni-channel experience. We have become a true omni-channel retailer through a combination of our physical touchpoints and digital platforms. Our continued focus on first-party data is enabling us to be a leader in utilizing the right customer and prospect data to drive a truly personalized omni-channel experience.

Speaker 5: and meets the needs and expectations of our shoppers wherever they choose to experience our brand and products.

Speaker 5: For e-commerce, we had a very strong quarter fall with sales growth of 26.4%, bucking the furniture e-commerce trend by over 4,600 basis points as one of the only brands to grow and be profitable.

Speaker 5: Traffic and conversion increased for fiscal 23 overall and conversion in particular has accelerated in quarter 4 as we benefited from a full quarter of our redesigned configuration tool which enhanced the overall experience.

Speaker 5: In terms of our showrooms, from a financial standpoint, they continue to generate very high four-wall contribution and deliver an increasingly strong return with cash-on-cash payback in under a year and reduced occupancy costs year-over-year.

Speaker 5: We now see opportunity to roughly double our current showroom fleet from 195 to more than 400 locations over the next five years. And we'll continue exploring shop and shop opportunities with additional retailers.

Speaker 5: Looking at our other channels, our Best Buy shopping shops are very powerful as they allow shoppers to experience our product, including our immersive surround sound system and StealthTech embedded technologies that are most effective when experienced in person.

Speaker 5: Importantly, Best Buy Shop and Shop attachment rates for StealthTech are roughly double that of our stand-alone showrooms and four times online and they continue to grow.

For Costco, we continue to strengthen our partnership with growth and physical roadshows planned for this year, which are managed by our team and are delivering improved economics to pre-pandemic levels.

Our omni-channel model is resonating with consumers as is shown by our improving customer satisfaction scores. Overall customer satisfaction in quarter 4 improved from quarter 3 to our highest levels recorded.

Riven in particular by strategic investments in resources and technology in our customer service capabilities, supply chain and our digital experience.

As we look ahead, we will continue to expand and improve our omni-channel strategy. For fiscal 24, we expect to open 30 new showrooms. Our real estate strategy continues to evolve, leveraging both our predictive analytics tools and consistently updating our site selection model.

Thirdly, our ecosystem. Our ecosystem is unique and robust with leading indicators that are all positive and best in class, including a customer lifetime value to CAC ratio that grew year over year, strong ROIs in marketing and word of mouth as our number one awareness driver.

Our ecosystem is centered around circle-to-consumer philosophy and the development of a circular ecosystem for our customers and products, driving optimal value for our customers and their design for live product platforms they have invested in.

The goal is long-term relationships. During the year, we continue to market our products and brand using national advertising in traditional formats, including TV and established media, coupled with various digital strategies leveraging social media, nonlinear TV and influencer advertising.

Our digital marketing efforts focus heavily on localized and targeted tactics, driving shoppers into a love-sack touchpoint to experience our products in person. This reinforces our commitment to a truly omni-channel business model, meeting customers where they choose to interact with us.

In fiscal 23 we gained over 130,000 new customers and our first year purchase margin was up double digits from fiscal 22.

Importantly, our full first-year customer lifetime value CAC ratio continued to increase versus fiscal 22, in spite of some headwinds in cost inflation throughout the year. Included in our measure of customer lifetime value is actually only the first purchase plus any repeat business within the same fiscal year.

at the end of fiscal 22.

We perceive these ROI metrics and our overall top and bottom line performance to be at the highest range of performance in the home and many other categories.

We are proud of these results, especially when they were strong like this before the pandemic, during and even after the pandemic. For fiscal 24, we will deploy new marketing tactics and notable endeavors that include continuing to invest in high ROI-performing programs such as Search and continuing to grow our hyper-local marketing to drive relevant traffic to our touchpoints.

We will also be leveraging prime and linear TV buys to continue to drive reach, and we expect to spend at a rate of 12% of net sales in fiscal 24 in line with last year. We also maintained our strong focus on ESG priorities, publishing our second annual ESG report in December of 2022, where we outlined long-term targets for diversity, equity and inclusion.

And to date, we have diverted more than 179 million plastic bottles from the waste rig. We believe we have diverted thousands of couches from the landfill as well, giving the extremely durable and adaptable nature of sectional. And then lastly, making disciplined infrastructure investments. In fiscal 23, we made critical investments and enhanced our best in class supply chain.

including opening our third-party-operated DC in the Fort Worth area. And this was fully at scale by the end of the fourth quarter and ahead of our target.

We also invested in technology, talent and working capital to ensure best-in-class delivery times in a highly volatile supply chain environment.

In Fiscal 24, our investments for growth will be primarily in the areas of technology and research and development that continue to fuel our flywheel.

This year we will also expect to sustain our customer satisfaction by delivering orders in just days, while also delivering inventory productivity improvements of around 20%, enabled by our recent investments. This will have significant effects on the efficiency of working capital as well as associated cost.

We made strong progress on our strategic priorities as we continue to successfully expand the business and make important foundation investments to drive as well as support the substantial growth that lies ahead in fiscal 24 and beyond. I will now pass the call over to Donna to review our quarter four and fifth.

Net sales increased 42.6 million or 21.7% to 238.8 million in the fourth quarter of fiscal 2023 with the year-over-year increase driven by growth in all channels.

This increase was stronger than what we had originally projected for the quarter, primarily driven by higher than planned internet net sales.

Showroom net sales increased $24.1 million or 20.5% to $141.9 million in the fourth quarter of fiscal 2023 as compared to $117.8 million in the prior year period.

The increase in showroom net sales was driven by an increase of 10.2% in comparable showroom sales related to strong holiday promotional campaigns and the net addition of 44 new showrooms and five kiosks compared to the prior year period.

As a reminder, point of sale transactions that we reflect in our comparable sales metrics 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 increased $16 million, or 26.5%, to $76.4 million in the fourth quarter of fiscal 2023 as compared to $60.4 million in the prior year period driven by a strong holiday promotional campaign. Internet sales, which includes pop-up shop, shop and shop, and business, and business

continued planned open box returned inventory transactions with ICON, our inventory bar to partner.

We hosted an additional 33 new Costco in-store pop-up shops and we continue to operate 22 Best Buy shop-in-shops. As a reminder, our inventory transactions with ICON are part of our C2C, EFL, 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. Our current fiscal 2024 projections only reflect open box inventory transactions in the first quarter as we continue to review all options available to align.

with our C2C, DFL, and ESG initiatives. Any of these initiatives beyond the first quarter will be upside to our fiscal 2024 projections. By product category in the fourth quarter, our Saxonal net sales increased 23.6 percent.

Back net sales increased 6.9% and other category net sales, which includes decorative pillows, blankets, and other accessories, increased 10.7% over the prior year period. Gross margin increased 70 basis points to 56.6% of net sales in the fourth quarter of fiscal 2023.

from 55.9% of net sales in the prior year quarter, primarily driven by a decrease of approximately 190 basis points in total freight, partially offset by a decrease of 120 basis points in product margins. The decrease in total freight, which includes inbound and outbound freight and warehousing costs,

margin decrease was driven by higher promotional discounting.

Our gross margin rate came in slightly below our projections by 40 basis points due to lower deleverage in inbound freight than originally projected in the fourth quarter.

Given the decrease in inbound freight rates, we continue to expect to see associated benefits, which will be modest in Q1 and most impactful in Q2 and Q3 of fiscal 2024.

The 18.9% year-over-year increase in SG&A was driven by an increase in employment costs due to new hires and variable equity compensation, increases in rent expense related to the addition of 49 new touchpoints with higher percentage rent on showroom net sales.

Increase in technology and professional fees and an increase in credit card fees related to increases in both sales volume as well as interest rates.

SG&A expense as a percentage of net sales decreased by 60 basis points as we leveraged in areas including infrastructure investments, selling related expenses, and employment costs even given the almost 22% sales increase. Selling and marketing expenses increased $300,000.

as compared to 13% of net sales in the prior year period.

As a percentage of net sales, advertising and marketing decreased by 220 basis points due to improved performance in our media activities, which has driven an increase in net sales. As a reminder, advertising and marketing investments benefit multiple fiscal periods.

Depreciation and amortization increased $535,000 from the prior year to $2.6 million, principally related to capital investments for new and remodeled showrooms.

Operating income for the quarter was $38.1 million compared to $24.2 million in the fourth quarter of last year, driven by the factors just discussed. Net interest expense of $16,000 for the fourth quarter was slightly lower than the prior year's period.

related to unused line of credit fees that increase due to the increase in our revolving line of credit earlier this year. 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 net interest and tax rate, from the

most directly comparable gap measurements in our earnings release issued earlier today. Net income for the quarter was $27.6 million or $1.74 per diluted share compared to $32.6 million or $2.03 per diluted share in the prior year period.

During the fourth quarter of fiscal 2023, the company recorded an income tax provision of $10.4 million as compared to an income tax benefit of $8.5 million in the fourth quarter of fiscal 2022.

The tax benefit recognized in the prior year was primarily due to the release of the valuation allowance on the company's net deferred tax assets in fiscal 2022.

The release of the full valuation reserve had a positive impact on both the fourth quarter and the fiscal year 2022 earnings per diluted share.

Adjusted EBITDA for the quarter was $48.3 million as compared to $32 million in the prior year period.

adjusted EBITDA for the fourth quarter was ahead of our expectations, driven by higher net sales and leveraging of SG&A and marketing expenses.

Turning to our balance sheet, our total merchandise inventory levels are in line with our projections and had leveled out as we had discussed on our prior call.

Inventory increased 10.6% year over year and we feel exceptionally good about the quality and the quantity of our inventory. Our evergreen in-stock inventory is a competitive advantage and it is not comprised of seasonal merchandise.

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 goals to maintain industry leading in stock positions and delivery time.

As we move into fiscal 2024, inventory levels will moderate due to inbound freight relief and our technology investments, which enable us to programmatically allocate inventory more efficiently.

We ended the fourth quarter with $43.5 million in cash and cash equivalents and $36 million in cash, and we end the fourth quarter with $36 million in cash equivalents and $36 million

This reflects the timing of our inventory investments and the seasonality of our net sales profitability and cash generation.

Please refer to our earnings press release for other details on our fourth quarter and fiscal year 2023 financial performance.

Now, moving to our outlook, for fiscal 24, we expect the difficult macro backdrop to persist.

Against this backdrop, we continue to expect to outperform our category and gain share, primarily driven by our planned innovation and touchpoint growth.

we continue to expect to outperform our category and gain share primarily driven by our planned innovation and touchpoint growth for the year.

We expect net sales of $700 to $740 million driven by the net planned opening of approximately 30 new showrooms and total comparable sales in the high single digit, below double digit range.

Our outlook embeds the expectation that the new product introduction that Sean and Mary discussed will launch in the second half of the year and does not include any assumption for open box inventory-related barter revenues beyond the first quarter, which was approximately $22 million in net sales for Q2.

current and future growth, as well as the impact of higher interest rates on credit card fees. D leverage across these areas of SG&A is expected to be only partially offset by gross margin expansion resulting from inbound freight due to lower container costs. The earnings per share are expected to be in the range of $1.83.

and net sales, $400,000 in adjusted EBITDA, and two cents in EPS, which is reflected in our fiscal 2024 guidance.

For the first quarter, we expect net sales of 133 to 136 million being driven by the planned opening of approximately 16 showrooms and a total comparable of 5.5 million to the total number of new

sales decrease in the 3 to 5% range. As a reminder, we are up against our toughest comparison of the year in the first quarter, given our Q1 comp last year was 42%. We expect adjusted even a loss.

in the $4 to $5 million range, driven by an expected gross margin decline of approximately 100 basis points, and SG&A be leveraged primarily in payroll, rent, and credit card fees.

Loss per share is expected to be between 36 and 37 cents for the first quarter with 15.2 million weighted average shares outstanding.

We are making important investments in the business to support current and future growth, including the new product introduction discussed.

These investments are critical to our ability to drive long-term growth and sustained market share gains. We are also investing from a position of strength when it comes to our balance sheet. We ended the year with $43 million of cash on the balance sheet and $36 million of availability under our AVL and OBRI. With the second half of our year traditionally being the strongest in net sales, we are now

The timing of our new touch point openings and new product launches and our planned flow of inbound inventory, we expect to use cash during the first three quarters of the year before generating substantial free cash flow in the fourth quarter. End the fiscal 2024 with a significantly higher year.

continue to prioritize disciplined execution, drive long-term growth, market share gains, and value for all of our stakeholders.

With that, we would now like to turn the call back to the operator who can open it up for questions.

Operator? Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.

And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask that you limit yourself to one question.

Our first question is from Brian Nagle with Oppenheimer. Please proceed. Hi. Good morning. Good morning.

is from Brian Nagel with Oppenheimer. Please proceed. Brian Nagel, Good morning. Nice quarter. Congratulations.

Thank you. So the question I have, and I'll kind of merge two questions together. First off, with regard to gross margins and Sean and Donna, you both mentioned, I guess.

improving dynamics as the year progresses, particularly Q2. The question I have is, can you help us better size, how much that, that kind of magnitude of that headwind to tailwind dynamic for Lufsack? And philosophically, I know we've discussed in the past, but as these costs begin to moderate, is there any, will there be some type of reinvestment in that or would you allow to kind of re-normalize?

And then the second question I have, just on sales, and you mentioned a number of times just the overall more challenging backdrop. If I look at the growth rates, you know, recognizing there's some noise here, but the growth rates in Q4 were better than they were in Q3. It's something from a macro perspective, ease up or improve it all for you.

We're going to have the speakers please check to see if their lines are muted.

No, we can't hear.

No, we can't hear. One minute.

I think Donna's having an issue with her phone, so apologies for that delay. Can I get a break?

So let me take the second question while Donna gets back on. So in terms of your point in terms of sales for Q4, obviously we were thrilled to see the improvements. When we talked to you at the beginning of December , at that point, we were tracking, I think we shared with you, at the high end of our guidance.

couple of other promotional cadences, which really did deliver the outperformance that we saw. So very happy to see the performance kind of translate through to that quarter for results that you saw. And I think particularly like e-commerce, we outperformed the industry by over 4,600 basis points.

We just relaunched our configurator for e-commerce with an amazing digital experience. We're seeing conversion up, traffic up, so just all of the fundamentals as well as everything else that we saw in the business in our touch points etc really drove great performance.

I think then in terms of the question that you had in terms of on gross margin, so in Q2 onwards, we do see, I think just over 240 basis points improvement from inbound freight. And then thoseslow

Donna, I think you can touch on we have a little bit of a headwind, Brian , without bump rate, but Donna, maybe I'll hand to you for that. Yeah, hopefully, Brian , can you hear me? Yeah, if I can hear you fine.

Okay, good. I don't know technology. Well, good morning. So, yeah, so, as Mary mentioned, we do see we do plan in all the guidance that we provided earlier about 340 basis points. Leverage or tailwind on inbound free costs, but there's about 100 basis points.

of headwind that's netting up against that, that related to increase in outbound and warehousing, which would be everything around warehousing labor, just operating costs in total. As I said, we're going to use this year specifically that net gain of about...

240 basis points is going to help mitigate some of the investments in our future, continued investments in our future that you see in some of the deleverage around SG&A. So this year it's helping mitigate some of those investments and we would hope as we go into future years out as we continue to grow.

in the guidance that we've provided.

That's all very helpful. I appreciate it. Thank you. Our next question is from Thomas Forte with DA Davison. Please proceed. Great. Thanks. Sean, Mary, Donna, Jack, great quarter, great year. So for my one question, Sean, I'm going to use my once a year question.

for your current thoughts on international expansion? Yeah, we are very excited by the prospects of international expansion. We hold our patents and trademarks all over the world and we intend to get there, but likely not this year.

We are very focused on the opportunity domestically. We've done a fair amount of research to understand the opportunity internationally, understand the size of prize. And frankly, we have...

barely scratched the surface in terms of what we think we can do against the total available market just in the United States, just in the categories we compete in now, and that's definitely the best use of investment dollars in the near term. So we'll continue to focus on the U.S. We'll continue to gain market share, we believe, but we do look forward to international expansion sometime in the future.

Great, thank you. Our next question is from Maria Rips with Canaccord. Please proceed. For more information, please during the Q&A session, stop by 1.BERSA.C. Extremely

Great, good morning and congrats on strong results. So it seems like your guidance factors in some level of conservatism. Are you noticing any changes in consumer trends or purchase behavior sort of over the past few months as inflation has been decelerating but the broader sort of macro environment remains highly uncertain? And maybe related to that, given that your product is not

Carrie, a higher price point. How has your Design for Life philosophy been resonating with consumers in this macro environment? OK, good morning, Maria. Hi, and thank you for your questions. I'll take the first one, and then I think Sean will talk a bit more around Design for Life. So I think as we've shared before, we do see varying shifts in how our customers are transacting, how we'reIs Austin Buffett and your Democraticol T

on Lovesack credit cards, which we factored in fully for the year. So, you know, that. And then I think, you know, our customer traffic continues to be very strong. And I think we saw that in quarter four. And I think that just bodes well to the strength of our flywheel because, you know, whether it be 38 cents of our customers aren't even cross shopping with anyone, it just goes back to the

our aperture to gain even more share through to the touchpoint expansions that continue to overperform Proforma with amazing economics. And then the marketing machine that we have around just the sheer gains of customer lifetime value with incredible CAC ratio performances that you just don't see anywhere else.

I think that in this environment,

we feel really confident based on what we're seeing. Clearly we're already into the first quarter of our new year and we're all watching the same news and we recognize that the consumer is under pressure in many respects.

but our designs for life products and business model, we think has resilience that others don't. So while we're not seeing the 50 and 60% kind of growth, we saw for a few years past, we're seeing stronger growth in the rest of the category. This has been a trend the entire time, before the pandemic, through the pandemic, post-pandemic.

and here we are today and we feel really good about that and I think that many onlookers you know question why that is and I think the biggest most glaring answer to that is our product. We have a very different product in the rest of category. It's designed for life, built to last a lifetime, designed to evolve. This resonates with people who have a brain.

who can do the math and understand that they are investing in something that can be within the rest of their lives and we're very proud of that. With that said, thank you.

The evidence, I think, is apparent not just in our results, financial results, but we have experienced recently the highest rate of customer satisfaction we've seen. This is through all of this choppiness and through the financial results.

all of the supply chain choppiness. And here we are on the side of that. And I think it shows our investments that we've made in the infrastructure of the business and our team bearing fruit. And that will, again, further strengthen the flywheel of people spreading the word of mouth about the Lovesack brand, about our design for life products.

and we intend to continue to take massive market share, particularly in this environment when others are beleaguered in various ways. And so we feel really confident about our product, about our brand, the way that we've wrapped it around the design for Life Ethos, what of course it means for the environment and everything that we stand for.

Great. Thank you so much. Our next question is from Matt Coranda with Ross MKM. Please proceed.

Hey guys, good morning and nice job on the quarter. Just wanted to see if you could provide any commentary on growth by channel that's embedded in the Fiscal 24 Outlook. Just for example, in terms of showroom comps versus location expansion that's embedded in the Outlook and then curious if you're going to grow across online and the other channels as well. And how are you factoring in?

stealth tech attach rates. Notice the data point you shared suggests that stealth tech attach rates are probably in the high teens list this last year. There's probably maybe some room for improvement there but just curious if you're factoring that into the fiscal 24 outlook.

Good morning, Matt, and thank you for your questions. I'll take the stealth tech one and then Donna can talk a little bit about the mix for the year. So, yes, obviously, stealth tech we've had in market for just over a year. And whilst we always, you know, are very excited about the performance I shared earlier in terms of the growth and particularly when we're looking at the growth of the technology

last year and I think in quarter for our customer traffic was up nearly 18% was really driven as new customers came in to dry to test this new technology this new experience and really to hear and feel it so we're continuing to plan for that to grow and he shared earlier that we expect it to be over a hundred million as the brand continue

it with an amazing experience coupled with our factional.

And then Donna, I think do you want to touch on the channel mix for the year? Yeah, so for the channel mix, we are projecting both internet and showrooms to increase year over year relative to all the things we discussed, do showrooms, product innovation, the one channel which I specifically called out.

is the other channel, which right now we are not projecting because of the return to box inventory transactions. That was about $22 million that we are not today has not been built into being repeated in any of our guidance.hornman.org.

That's the one channel just by removing those BARDA inventory transactions that in our current projections is not projected to increase. But the other, the Costco and the Best Buy within the other channel is, in total the other channel is not projecting to increase just because of the extraction of those.

inventory bar to inventory transactions. So showroom increasing, internet increasing, obviously we look at it all as omni channels, so it's increasing in total and it's increasing separately as well. And the other channel just as a highlight because of the return box inventory transactions currently.

being rejected to happen again, Q2 through Q4, that is coming down slightly. But, Costco invests by increasing year over year within that channel. Hopefully that helps. Very helpful. I'll come back to you. Alright.

So the Q2 through Q4, that is coming down slightly. But Costco invests by increasing year over year within that channel. Hopefully that helps. Very helpful. I'll come back to you. Thanks, guys. Okay. I'll go back to you a second.

Our next question is from Alex Furman with Craig Callum Capital Group. Please proceed. We'll have five seconds.

Hey guys, thanks for taking my question. I wanted to ask about the increasing lifetime value to customer acquisition cost ratios, which is really impressive and counterintuitive, I think, given everything going on with the economy and high inflation and interest rates. So, curious what's been driving that. What has been more about more...

efficient customer acquisition, or is it more as you add more products that you're seeing more of an increase in the lifetime value over time, or maybe you're seeing it from both sides of it. But any color you can give us there would be very helpful. Thanks.

Yeah great, thank you Alex and yes equally we're very thrilled to see results that we just don't see from anyone else and I think what's really also exciting is that you get full payback just from the first transaction or more and you know we only use I think as we taught the first fiscal year of purchases.

And we know they come back to us for decades. And I think as I shared, our repeat business is actually up to 38 cents of our transactions. So, you know, we are getting much more efficient in terms of customer acquisition. The team do a great job, whether it be a hyper local marketing through to just the optimization on search, a nonlinear and even just, you know, sharing out the awareness of the brand all the way.

in our flywheel expansion going into new categories over time and everything that we've shared you can just start to see even more the efficiency opportunities that will continue and the team have done a great job there's been some inflation but they continue to optimize shift and really manage the mix incredibly well and we're very proud of all of their hard work

because we really do see that big industry leading. Great. That's really helpful. Thank you very much. No. Thank you, Alex. We have reached the end of our question-and-answer session. I would like to turn the conference back over to Sean Nelson for closing comments. Yes. We'd like to thank all of the participants for their time.

connect your lines at this time and thank you for your participation.

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