Q1 2024 The Lovesac Company Earnings Call
Greetings and welcome to the Love Sacs first quarter of fiscal 2024 earnings Conference call.
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It is now my pleasure to introduce your host Rachel Schacter of ICR. Thank you. Please go ahead.
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 you All know 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 or future financial performance.
This includes 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 Companys filing with the FCC, which includes today's press release.
You should not rely on our forward looking statements as predictions of future of that.
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 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 today I'll start by reviewing the highlights of our first quarter fiscal 'twenty 'twenty four performance and then briefly provide an update on our operational accomplishments and outlook.
Then married Fox, our President and C O L. Well update you on the progress we made against our strategic initiatives this quarter and finally, Donna <unk>, our CFO will review, our financial results and a few other items related to our outlook in more detail.
We are pleased with our first quarter results that beat expectations, even amidst a challenging macro backdrop and against our toughest comparison of the year in the first quarter.
Elevated inflation and higher interest rates continued to drive a more cautious consumer pressuring the home category overall, we're not immune from these headwinds, but as evidenced by our consistent and reliable results, we have significant advantages versus the broader category, which I will expand upon in a moment.
The nature of a physical touch point digital platform.
I also wanted to really thank Jackson's honest for their incredible partnership and I'm very happy that we will continue to work with that new capacity and I'm also really looking for it's about with Keith.
I'd like to ask a question. Please press star one on your telephone keypad at this time I'll confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up the handset before pressing the star keys, we do.
I ask that you. Please limit yourself to one question and one follow up to allow as many of the opportunity to ask as possible again.
And that is star one to register a question at this time.
Today's first question is coming from Brian Nagel Oppenheimer. Please go ahead.
Hi, good morning.
First off good morning.
Donna and Jack on your retirement, it's been a pleasure working with you.
Yes.
So my question.
My question I guess, the first question you could talk about just the gross margins you know as you may be getting better line of sight now to some improving cost metrics I mean, how should we think about the gross margins from here. There's been some stabilization, but you are still tracking meaningfully below what had been historic peaks.
Yeah.
Brian specifically around the gross margin are you looking to say where do we see the benefits.
Yeah. So as we think about the trajectory from here you know either through the balance of 'twenty three 'twenty, four and maybe kind of puts and takes any update there.
Yeah. So first of all thank you for for acknowledging the earlier today.
And just on the puts and takes of the gross margin really what we're going to see is.
Substantial benefits.
As we said 200 basis points increase on gross margin, which is substantially related to the benefits that we're seeing coming in through the lower freight costs, but which we paid for last year were just getting the benefit of it coming through the P&L This year.
That benefit that we will see we will fully come through in Q4.
And.
And we feel really confident in that we have really good line of sight into that or container costs are actually continue still continuing to come down.
But what what we are still seeing there is.
Some we'll call it inland transportation costs that are really what we call as demurrage rate, which is beyond our control. It's really getting the containers are once they hit the ports here in the U S to our facilities. So where you do hear will contain our costs are coming down to 3000.
$4000. There is still some additional costs there related to the inbound transportation.
Of those containers, but significantly less than a year ago. When we were saying it's 25000, we're probably paying all in even with the marriage probably closer to five so those costs will will see the full benefit coming through that on the fourth quarter. So barring any.
Anything else that comes our way with inbound container cost next year will be a clean year for us, but we do have some headwinds as those other companies on.
Last mile which is the Fedex is of the world in the U P. S. We predominantly use Fedex.
But where we are doing all that we can to mitigate that.
<unk>.
Mary May share some additional initiatives that we're looking at with other carrier opportunities.
We actually start with are really at a really good spot with our negotiations our rates with Fedex on.
And then on warehousing and the same thing.
With higher labor costs, we are seeing a little headwind in there, but that all being said that is all accounted for in any of the guidance that we've provided plus a little extra to make sure that we cover things that we may not see coming our way.
That's very helpful. I appreciate it.
And my follow up question with regard to sales. So I think Donna you mentioned in your comments.
Full forward from I guess from Q2 to Q1.
Just help size that.
What that relates to specifically and then within which we've talked about some of the promotional activity. Sean you talked about promotions still tracking up from last year, but still below where they've been historically as you think about the business in this backdrop.
Would you consider being.
Actually more promotional stepping up promotions more you have to really help them.
Yes.
The continued market share front.
Morning, Brian It's Mary had said just to your first question in terms of the shift that Donna reference.
I think well you know one of the great things that we're learning is that we don't necessarily always have to have promotions at key tentpole moment.
The quote pipeline fills up very fast and that we actually tested doing an off cycle promotion to basically just drive a bit more conversion. So that was towards the end of April and the demand far exceeded our net sales for the quarter.
So there was a little bit of a shift in that some of that is obviously in reflection of what <unk> guided to for Q2 and I think it again goes back to the strength of our brands and also the ability for us to gain customers in advance of maybe sometimes when they were thinking of patch thing when others are on promotion. So we.
Very good fourth quarter too.
As Sean shed that we've got a great perspective, having Ted frankly Memorial day, which is all big Tentpole in this quarter.
And we feel good with a strong pipeline good promotional cadence.
Good in stocks and the teams are really set to keep continuing to outperform as we demonstrate every single quarter.
Sean I think on promotions and I'll touch on that and then I'll hand, it to you.
The team continually demonstrate the ability to be agile.
Testing as you can see by the results.
Our child, we're actually getting better by dropping ball programmatic in and going directly to customers with quote first sitewide flashes.
But as Sean said, you know generally promotions have been holding the line since the.
The second half of last year.
You can see from our results we far exceeded anyone else, we continue to gain share and that's all just reinforcing the strength of our flywheel and that we are a company specific product cycles story, not a macro demand business.
So we feel good with the plan, but the teams will continue to adjust accordingly.
Yes, I agree.
Nothing to add other than that we will continue to be really diligent on this front. We are focused on building the brand and the most.
Our long term focused way possible, even through you know tighter times and.
That's definitely affecting our outlook on promotions in general we intend to be.
To be really disciplined.
I appreciate all the color. Thank you.
Thank you Brian .
Thank you. The next question is coming from Mary <unk> of Canaccord Genuity. Please go ahead.
Good morning, Thanks for taking my questions and the online chat best of luck going forward. It was a it was great working with you.
First is there any indication as to whether consumer trends and maybe discretionary spend is getting better or worse over the past couple of months. Obviously you reiterated your full year outlook and then and then any color. Maybe you can add in terms of high end consumer which is more price sensitive buyers here.
Yeah. Good morning, great to hear from you. So I think you know.
Obviously, just a match the yearend update.
A couple of months ago, we're not seeing anything that's significant from that or any consistent trade down trends I think the fact actually what we're seeing is that they tended to have a flat to slightly elevated makes the premium upgrades in that purchase we do see as we chat before they are used to financing.
That continues to trend up versus last year, which we fully plentiful.
And as other brands of Shack, we're actually seeing customers buying later at the end of a promotional.
First as you know last year, and I think a lot of that.
You know last year, they were buying because of concerns around availability just in general in the market and obviously with that more secure.
The category people are holding back a bit, but I think thats consistent to what everyone else does shed.
It's more settling back to pre pandemic cat buying patterns, but I think you know we also see and I think Sean said this the full 38% of our customers don't need some cross shop us with anyone else.
You know we are you know they come in they want to buy they use the credit.
You know where they want to on the financing.
But just the brand strength just continues as you can see in the results.
Got it that's very helpful. And then you talked about making some sort of infrastructure attack and R&D investments to support future growth could you may be.
Provide us with an update on how those initiatives are progressing maybe a little bit more color on what those in bus ads are and and.
And I guess, which which areas of the business are they designed to impact the most.
Yeah no. Thank you for that question. So I think firstly on the tech investment a key one and I think as Donna shed and I said the ability for us to stop.
To optimize on our inventory levels with some of the investments we started last year into this year.
With order management systems, and and really the Fayetteville, let's say to be a lot more surgical around why we paced and been trying to how we replenish to autos.
So that was a big investment we're seeing that benefit that will come through obviously in working capital and also the ability to have less weeks of sale, but yet still delivering the outstanding continued improvement.
Customer satisfaction.
Another example that we're investing in is around customer service, we shared with you before around some of the work that and just obviously more recently, we kicked off a pilot with an AI platform called Tankful, which is testing machine generates responses for our frontline associates that are serving customers and we think this investment in <unk>.
Is so critical for our customer experience and then supporting our teams in all of that crucial work every day. So those are just a couple of examples on the tech side and then the rest of the investments of these the waste shed is around research and development, which is of course.
For a long term crisis right.
That's very helpful. Thank you so much for the color Mary.
Thank you Marie.
Thank you. The next question is coming from Thomas Forte of D. A Davidson. Please go ahead.
Great. So first off congrats Sean Mary and team.
Jack Best of luck. It was a pleasure working with you I look forward to your guidance on the board Donna I'm Gonna misuse of pleasure working with you and best of luck as well alright. So for my first question and then I'll pause and follow up so Sean I think you did a great job with data analysis.
Does the data tell you regarding consumers, who may appreciate the functionality of the product, but don't purchase it or maybe they purchase it but they didn't buy it for more rooms in their house.
Because of the aesthetic and then can you talk about the angled sides versus the role or when you rolled out the role arm.
And how that had a positive impact on your results.
Yeah.
Yeah. So thanks for the question good to hear from you.
Factional is a very successful couch platform because of its flexibility.
It has taken us years of of being in the marketplace paying.
Paying for research.
<unk> continued to refine the platform.
And tease out where the biggest opportunities lie.
And we continue to knock those out one after the other year after year as we continue to do.
Drive the sectional platform to become as we think of at the apex predator and couches right, we want it to be.
All things to all people as much as it can be and so far it's proving successful and.
The results of course R. R.
In the.
The evidence is in the results.
Said, we know that there are two core things that drive this business.
One is comfort.
And two is style.
In the case of the angled side, we have.
Both are being addressed and it's been a really effective launch we knew that it would be based on our research and I think that really speaks to the strength of how loves Shaq operates.
We were a research led organization we.
Blend this call.
Call It CPG approach to research product development.
Customer development customer research.
Along with pure invention.
To generate platforms that are uniquely.
Competitive and so we know that.
<unk> is always going to be an issue when youre dealing with a product that was intentionally created to be evergreen.
Two.
<unk> be the same for years and years.
Theoretically forever, hopefully by taking a very vanilla and simple approach and in a way that would offend nobody and hopefully be addressable be relevant to everybody.
With that they're at least tons of opportunity left on the table. So for instance years ago you'd mentioned, we launched role arm.
As a way to address a more conservative.
Traditional customer.
She is looking for that more traditional look in their home.
And it was wildly successful and it's been part of our Lux <unk> ecosystem for years now.
Got you.
You can think of angled side as a more modern version of that but angled side goes further because not only does it address in aesthetics that we did not have but it also frankly provides a different comfort level. Then we offered up until now like when you get the chance to sit on an angled side because understand the word side in our world is not just in the arm.
It's a back it's interchangeable. So you can have all angled sides all the way around and now your sectional bringing back a little further to sitting space is a little larger and it really sets the table for other innovations that will come as well.
That will.
Further address comfort and aesthetic. So you know its actuals already what we witness happening if people bisexuals for whatever room. They have in mind for it often it'll be a basement.
Our bonus room, who knows what because you can make them. So large you can integrate skull tack and have surround sound you can have a huge pit setups that kind of thing and we will take it those are huge purchases, but their experience is so good of course with the actuals and that proves overtime right people spill live their life expand.
That will be shipping into Q2, and if you remember our our comps for showrooms are based on demand and not net sales.
That we took at the beginning of the quarter and they are still sitting there. It was just timing of promo and when we can ship. So essentially our open orders turn into net sales within.
Week or so.
The demand being created but that timing of demand versus shipments is what youre also seeing lacks in.
Demand being higher than our net sales for.
And then for Q1.
And that.
Memorial Day, Matt to your question, obviously, we were thrilled.
With the performance of them you know the promotion depth and frequency we've been holding.
And as a cadence in the second half of last year. So nothing new from that side I think there was some excitement.
You know from the angled side, our soft launch, which you know is just obviously in showrooms at the moment and then you know I think back to the investment that Shawn talked about it's about a 25th anniversary.
And just you know that the level of media impressions that we get then you just you know you'll see a long term benefit to that as well as obviously you know in the quarter.
But we were very pleased and we've seen that performance continue from Memorial day.
Okay, Great and then just for my follow up on the margin guide for the second quarter. It sounded like I think Donna you said, maybe 200 basis points on gross margins ought to make sure I heard that correctly, what does that assume in terms of promotional cost headwinds on a year over year basis, just trying to.
Triangulate sort of around what are you assuming there versus some of the freight benefit and then on the how that flows down to the adjusted EBITDA Guide just curious it sounded like youre going to be leaning into marketing in the second quarter. So just wanted to understand a bit more about where you guys see opportunity to invest those dollars on the marketing side.
Yeah, So I'll start yet cement that's correct I did say 200 basis point increase in gross margin.
Q2 of this year as compared to Q1.
And there the upside to gross margin from the benefits of the inbound freight is greater than the 200 basis points year over year increase I don't have the specific numbers, but it's.
It's not only.
Promotional activity and as Mary had said and I think Sean has said we are a little bit more promotional than we were this time last year, but we are nowhere close to as promotional as we were pre pandemic levels. So there is a little bit there in product margin, but we also as I had noted we do have some.
M D of leverage I would call it in outbound freight just as it relationship to cost increasing for us and everybody else.
And a little bit of deleverage in our warehousing.
Yeah.
As we expand our warehouse network and cost there become a little bit more expensive just relative to labor at the warehouses those are not our warehouses by the way just to remind you those are three pls.
So that net of 200 basis points.
Is.
Greater in our inbound freight which is netting down to 200 basis points because of the increase year over year and product discounting as well as outbound freight costs and warehousing.
And b it just didn't get it yeah. So to your question on marketing.
We will see a where we saw in Q1, a slight leverage of marketing I think it was about 30 basis points, we are expected to see because of the investments around our brand.
Brand building events. In addition to angled side, a big Big Big things.
Things for Love Sac.
We will see the leverage in marketing in Q2, specifically around those events.
All put land and some guidance planned into our annual guidance at all accounted for in our quarter guidance.
SG&A on a deleverage of SG&A, we are deleveraging approximately the same amount we did in Q1 so there.
They're all of the planned cost their planned investments.
And we will start to see all of those costs leveraging into the second half of the year predominantly in the fourth quarter.
And that will impact the adjusted EBITDA, but we feel really comfortable very very confident in Vienna, we built in all the costs that we can see coming our way in any upside to those numbers.
The team will decide strategically how to and when to reinvest those dollars.
Okay Super helpful guys. Congrats again.
Jack and I will jump back in queue.
Thank you.
Thank you. Our final question today is coming from Alex Fuhrman of Craig Hallum. Please go ahead.
Hey, guys. Thanks for taking my question and congratulations on a strong quarter and Jack and Donna has been a pleasure getting to know you over the years that congratulations to you both as.
As well.
Wanted to ask about the Big picture here I mean, you mentioned the average first time transaction value for the axonal purchased now it's about $5000 that he feels like he was only maybe a couple of years ago that number was closer to $3500 can you just kind of give us a sense of what are people buying today in <unk>.
Terms of pieces and fabric and things like that compared to what they were buying just a couple of years ago.
Yeah. Thanks for the question.
Sectional.
Average order value has just continued to go through the roof year. After year, it's been climbing steadily as you witnessed that a major part of our growth overall.
And we're really proud of that and that's driven by innovation.
People are buying.
Larger set ups generally I, just think that the bigger our brand gets the more that aided and unaided awareness expands and the more that our brand is except in the marketplaces as something thats not so French something that's not such a.
And an unknown people just get more comfortable I think spending with us and really taking the risk on bigger setups in so that's number one number two stealth tech huge.
A huge driver for us.
And we expect to see.
Do you see some of the same behavior around angled side remember it also drives repeat business for us but.
Speaking specifically about that first purchase which is what you asked and that's what we're referencing people that are buying actual for the first time, that's where the largest dollar tickets for us where we're totally focused on that we've been focused on that for years. We will continue to be focused on it as much as we feel really great about our growth and our success in and how much.
Just the just the sheer size of love sack compared to what it was two or three years ago. Even the reality is we're still just a small fraction of this upholstery category just a small fraction because it's so splintered, it's so fragmented.
And it's fast every home that you're that you know of has a couch and it we intend to be there. We think we make the best one and we will continue to make it better through innovations like the ankle side and so that's what all this innovation is what's driving that first purchase I've combined with our brand cloud.
And that's where all of our investments are all of our focus social media marketing everything is all part of that effort.
That's really helpful. Thank you Sean.
Yep.
Good to hear from you.
At this time I'd like to turn the floor back over to Mr. Nelson for closing comments.
Yes. Thank you so much for joining today, we look forward to another year of growth as we build toward our longer term ambitions.
We appreciate the continued support of all of our investors and hope to create continued value for all stakeholders with our commitment to this designed for life way of doing business.
Have a great day.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect. Your lines at this time or log off the webcast and enjoy the rest of your day.
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