Q3 2024 The Lovesac Co Earnings Call
[music].
Greetings welcome to Love Sac third quarter fiscal 2024 earnings conference call.
At this time, all participants are in listen only mode.
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.
Please note this conference is being recorded.
At this time I'll turn the conference over to Elizabeth sure Mitch.
Sir you may now 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 keep stickier Chief Financial Officer.
Before we get started I would like to remind you that some of your information Disgustful include forward looking statements regarding future events and our future financial performance.
Statements about our future expectations financial projections, and our plans and prospects.
Actual results may differ materially from those statements.
For a discussion of these risks and uncertainties you should review the company's filings with the U S. D. C, which includes today's press release, you should not rely on our forward looking statements as predictions of future events all.
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.
non-GAAP financial measures, including EBITDA and adjusted EBITDA.
These non-GAAP financial 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 release now I would like to turn the call over to Shawn Nelson Chief Executive Officer of the livestock study.
Thank you Liz good morning, everyone and thank you for joining us today.
I'll start this call off by reviewing the highlights of our third quarter fiscal 2024 briefly providing an update on our operational accomplishments and finishing up with our outlook then marry Fox, our president and C. O L. Well update you on the progress we made against our strategic initiatives.
And finally, Keith Cigna, our CFO, who will review our financial results and a few other items related to our outlook in more detail.
Turning to the highlights of our results.
Not a lot has changed since we spoke with you four weeks ago.
<unk> continues to deliver strong financial results and category outperformance backed by a very strong balance sheet.
For third quarter, we're pleased to confirm top and bottom line results that were in line with the outlook provided on our second quarter call in November 3rd.
The headline is that third quarter net sales grew double digits and a double digit negative category.
To be clear the macro backdrop largely remains the same as last months lingering macro uncertainty leads to consumer caution and pressure on the furniture category.
Which we estimate was down mid to high teens in the third quarter.
However, our playbook also remains largely unchanged and continues to deliver.
Our disruptive design for life platforms impactful product innovation.
Telling marketing and highly productive omnichannel footprint continue to distinguish our unique brand and engender customer 11 loyalty.
More specifically for the third quarter total net sales were 154 million up 14, 3% versus the prior year period, and 32% on a two year basis.
Omnichannel comparable net sales growth was 2% for the quarter.
Key metric for how we evaluate and manage our unique omnichannel business, we delivered gross margin expansion and substantial abatement and SG&A deleverage as expected, which led to materially improved profitability compared to the third quarter of fiscal 2023.
Adjusted EBITDA reached a positive $2 5 million compared to a negative $6 9 million in the prior year period.
Net losses also improved.
Two 2 million compared to a net loss of $7 million in Q3 last year and that's despite nonrecurring expenses related to the restatement that are called out in our press release.
Loves that team continues to execute across all our priorities, including our innovation agenda physical footprint expansion omnichannel experience from order to delivery and marketing efficiencies Mary will discuss in more detail. The progress of these growth strategies in a moment.
As we look to the final quarter of the year, which includes the all important holiday selling weeks.
Like to note the following the macro environment and in turn the discretionary home category has remained challenging as we sat on our last call. We are not planning for any meaningful recovery in category growth in the near term.
Yes.
As expected the promotional environment was more competitive over the black Friday, and cyber Monday period than last year, but.
But as we discussed with you last March we adapted our plans increasing that discount slightly and delivering relevant and distinctive marketing with strong gross margins to boot.
Taking all that into account and with the Black Friday, and cyber week events behind Us I'm happy to say that loves Shaq has continued to grow and outperform the category.
As a result, we are further tightening our full year net sales guidance range now $710 million $720 million, which represents high single to nearly double digit growth, even excluding the impact the 53rd week this year.
He truly standout performance.
We are not ready to provide guidance for fiscal 2025. Today. However, we will prudently control expenses.
And with a focus on efficiency.
Against proactive investments in new products to drive profitable growth.
In summary, we are pleased to deliver third quarter results that were in line with our expectations and which once again are ahead of the competition.
Operational progress, we are making against our growth strategies, along with disciplined investments in key foundational areas like technology, new product innovation and insights continue to fortify our flywheel, thereby driving consumer demand and expanding our market leadership, which we believe can last well into the future.
Finally, I want to thank the entire loves shaq team.
Their tireless execution of our strategies and delivery of our goals, especially during this critical time of year.
Our disruptive model enables us to continue to grow thrive innovate and invest in this business.
But it is our people and ensure an outstanding customer experience and are the reason.
Loved facts family is growing so steadily as we enjoy a great holiday season together.
With that I will hand, it over to Mary to cover our strategic priorities and progress in more detail.
Ari.
Thank you, Sean and good morning, everyone as Shawn discussed with sales growth of 14, 3% until quarter. Three result, again reflected industry, leading growth driven by our unique omnichannel business model importantly on a full year basis. Our sales are up 196 with that from pre pandemic level.
And our adjusted EBITDA margin has increased 880 basis points over the same time period.
Degree outperformance has continued this quarter with strength in demand versus last year doing fiber phy from Black Friday through cyber Monday, and we are very pleased with all early without some highlights from this type of fight include having our two largest sales days and the largest week in our history. We believe this.
Pecan sales that is unique to our business within our category is due in part to our investment in building a brand that is unmatched in the furniture category, coupled with delivery to customers homes and just a few days.
Our clear strategy for growth and the teams consistent execution against our growth strategy allows us to continue to fuel our flywheel and drive operational excellence across the business.
I will now share the highlights of our operational progress in quarter three.
Firstly, starting with product innovation.
During quarter, three we expanded distribution of our newly launched tangled side, which is now available across all showroom base as well as the E com platform and we're very happy with the impact and feedback angled side performance is even above our original expectations, which were ambitious.
The sizing how much is a meaningful driver of our overall continued growth in category outperformance.
I said before we partnered with architectural Digest, a long tangled side, the consumer and design a world.
Event was well attended by influences as well as media outlets, such as Vogue and glamour and of course architectural digest in.
In addition to generating over 1 billion impressions. The event was surrounded by architectural Digest paid media third Repowering. The success, we've seen since launch in short with very happy with the early performance of angled side I think it's approaching becoming loved facts number one style choice after only a few months.
We're also launching some strong collaborations into the holidays, including a partnership with Nordstrom as football game developer foot back that will be featured within Nordstrom and Nordstrom Dot com This holiday.
We continue to demonstrate that we will gain market share through our new product introductions and brand collaborations as awareness and appreciation continue to grow all of which reinforce the strength of our customer centric business model.
Our Omnichannel experience. This model is driven by a combination of all physical touch points and all digital platform.
During third quarter, we opened 10 showrooms.
<unk> best buy shop in shops.
With regards to all best buy partnerships sales were up 42, 8% in quarter three driven by increased shop in shop presence, but this last year.
Our E Commerce channel performance continued to show strong growth and increased 20% the last yet and contributing meaningfully to our category outperformance.
Our omnichannel model and investments into touch points and website technology continues to drive improved customer satisfaction as we continuously monitor the feedback and improve the overall customer shopping experience, we made significant improvements to the website shopping expense before entering our holiday cold freeze.
Including new configurations to ease the customer rebuy journey update the post purchase experience and platform security and heartburn from collaboration across touch points and e-commerce enable us to continuously improve the omnichannel experience.
Third is our brand ecosystem at the central bar ecosystem lives, our efficient marketing and affect your gripe with brand awareness familiarity love and ultimately customer acquisition, which supports our strong customer lifetime value to customer acquisition cost ratio.
Overall, we continue to be agile with our marketing mix at the backdrop full customers' interaction with our category continues to change let me share a few highlights of what we've been working on for.
For awareness more broadly increasing efficiency and achieving reach enabled us to drive rate and also improve targeting simultaneously.
Lifeboats Upfronts are a key example of this improvement while on the subject hopefully you all have seen our newest commercial but tested very strongly across all metrics.
We continue to closely scrutinize digital marketing program optimizations to our STM and social programs, which have driven improvements in our overall AD exposure on cost metrics, along with improving conversion rates and ROI.
We've had strong success with some social partnerships reinforce the residents of our brand with culture.
Ali Damelio posted from her new home unlocked that product sheet request it and as you know she has more than 151 billion follow this up tick tock and over 9 million Youtube subscribers.
We collaborated with Justin Pugh on a special thought when his Saturday night football intro restaurant straight off the couch.
And these two collaborations gone at over 35 million impressions are not just a few example of the work our team are doing building brand loves and stickiness.
And not to be forgotten direct mail campaigns. Once again delivered strong rois for us and not only drove customer acquisition, but aimed at increasing lifetime value with our customers.
Lastly, we are really excited to see the squad named Dell Tech one of its best 37 Gadget for 'twenty two 'twenty three yes that is right to couch made the best Gotcha list reinforcing the strength of design for life product.
By technology.
And finally disciplined infrastructure investments inefficiencies during quarter three we continue to make investments in technology and research and development as we scale our business for the long term, we can pay to the national rollout to predict spring a new Pos system in all of our touch points. This rollout and have just a couple.
<unk> expense for speed of transactions and unlocks new modern payment options like pay by link capability.
A quick delivery continues to drive customer satisfaction on all investments in supply chain, which we remain on track to deliver by the end of this year are expected to help drive inventory productivity improvements of 20% as we have previously stated.
As mentioned last quarter, we continue to make progress on our second operations and open box inventory as we focus on improving the execution effectiveness and brand experience and we are seeing over 48% improvement in the unit back to stock versus last year.
As a result of these initiatives, we expect to see improvements in working capital as well as the associated cost reductions across inbound freight and warehousing, which we saw in quarter three and will continue to realized in quarter four.
Investments and gladly all customer service platform has allowed us to better serve customers across of all sales and service strategy briefing over eight points of increase in sea loves customer satisfaction scores in quarter three over the same quarter last year and an impressive increase in service performance.
Last year during cyber five.
We are laser focused on operational excellence and we will continue to manage our cost structure and capital allocation as we deliver operational performance ahead of our competitors.
In summary, we are pleased with our results for the third quarter and our continued and consistent track record of market share gains I want to Echo Shawn's crushed it you to our amazing team members for helping drive these financial and operational outcomes.
But the big holiday weeks that we just covered and the ones to come one thing that is certain is that we are ready for them and look forward to closing out the fiscal year, having built on our market share gains expanded our physical footprint with highly productive locations improved our digital go to market position.
Made important infrastructure investments and doing all of this while advancing our innovation agenda.
I will now pass the call over to Keith to review, our third quarter results and our outlook for the fourth quarter Keith.
Thanks, Mary, let's jump right into a quick review of the third quarter, followed by our outlook for the rest of fiscal 'twenty four.
Net sales increased $19 2 million or 14, 3% to $154 million in the third quarter of fiscal 'twenty four with the year over year increase being driven by web and showrooms. This was in line with what we projected for the quarter driven by our 20 <unk> anniversary celebration and the launch of angled side.
Showroom net sales increased $15 7 million or 18, 9% to $98 7 million in the third quarter as compared to $83 million in the prior year period.
Increase the showroom sales was driven by an increase of 2% and omnichannel comparable net sales growth related to higher point of sale transactions with higher promotional discounting in the prior year as well as the net addition of 41 net new showrooms compared to the prior year period.
You'll notice that beginning this quarter. We've replaced previously provided comparable sales growth metrics with a new metric omnichannel comparable net sales growth. This is the metric most closely aligns with how we evaluate and manage the financial performance of our Omnichannel business. It also eliminates noise costs through the <unk>.
<unk> of demand based metrics in the past such as orders placed but that have not been <expletive> and should therefore be far more useful for your models.
Internet net sales increased $6 7 million or 21% to $40 million in the third quarter of fiscal 'twenty four as compared to $33 3 million in the prior year period. Other net sales, which include pop up shop and shop in shop and open box inventory transactions decreased three.
<unk> 1 million or 17, 1% to $15 4 million in the third quarter of fiscal 'twenty for the decrease was principally due to a lower open box inventory transaction level, only $2 5 million compared to $4 2 million in the third quarter fiscal 'twenty three.
Our open box inventory transactions with icon are a part of our circular operations designed for life and <unk>.
ESG initiatives as we discussed last quarter. These transactions are waning and materiality as our initiatives to optimize our process for return product kick in.
This better aligns with our sustainability goals and should retain more profits for loves shaq at the same time, we may engage in limited open box inventory transactions with icon going forward to ensure that our warehouses are operating as efficiently as possible by.
By product category in the third quarter, our <unk> net sales increased 18%.
<unk> net sales decreased 10% and our other net sales, which includes decorative pillows blankets and accessories decreased 15% over the prior year.
Gross margin increased 920 basis points to 57, 4% of net sales in the third quarter versus 48, 2% in the prior year quarter, primarily driven by a decrease of 1070 basis points and total distribution and related tariff expenses. This.
Offset partially by 150 basis points of pressure from higher promotional discounting.
The decrease in total distribution and related tariff expenses over the prior year is principally related to the positive impact of 1160 basis points decrease in inbound transportation costs, partially offset by 90 basis points and higher outbound transportation and warehousing.
Ross.
SG&A expense as a percent of net sales increased by 420 basis points in the third quarter or half the deleveraging in the second quarter. The deleverage was primarily due to deleverage with an employment cost selling related expenses tied to the loves that credit card continued investments to support.
Current and future growth and also professional fees.
In dollars overhead expenses increased $10 million.
Listing mainly of increases of $6 3 million in professional fees and $3 $7 million in infrastructure investments and other miscellaneous items.
Employment costs increased by $2 9 million, primarily driven by an increase in new hires in fiscal 'twenty for self.
Selling related expenses increased $1 5 million principally due to credit card fees related to the increase in net sales and an increase in credit card rates.
We estimate nonrecurring incremental fees associated with the restatement of prior period financials was approximately $1 7 million in the third quarter.
Advertising and marketing expenses increased 2 million or 10, 8% to $21 1 million for the third quarter of fiscal 'twenty four compared to $19 1 million in the prior year period.
Advertising and marketing expenses were 13, 7% of net sales in the third quarter.
Compared to 14, 1% of net sales in the prior year period.
Operating loss for the quarter was $3 6 million compared to operating loss of $10 1 million in the third quarter of last year driven by the factors, we just discussed.
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 this morning.
Net loss for the quarter was $2 3 million or negative <unk> 15 cents per diluted share compared to a net loss of $7 4 million or negative <unk> 48 cents per diluted share in the prior year period.
During the third quarter of fiscal 'twenty four we recorded an income tax benefit of $1 million as compared to $2 8 million for the third quarter of fiscal 23 <unk>.
The changing benefit is primarily driven by the reduction in net loss for the quarter.
Adjusted EBITDA for the quarter was an income of $2 5 million as compared to adjusted EBITDA loss of $6 9 million in the prior year period adjusted EBITDA for the third quarter was ahead of our expectations, principally driven by the upside to gross margins.
Turning to our balance sheet, our total merchandise inventory levels are in line with our projections and if leveled out as we discussed on our prior call. This is despite the addition of angled sides skews and we believe this is a clear highlight of the uniqueness of our business model.
We feel exceptionally good about both the quality and quantity of our inventory and our ability to maintain industry, leading in stock positions and delivery times.
We ended the third quarter with a very healthy balance sheet inclusive of $37 7 million in cash and cash equivalents as well as $36 million in availability on our revolving line of credit with no borrowings. Please refer to our earnings press release for other details on our third quarter financial performance.
Now our outlook and let's start with the fiscal fourth quarter, we estimate net sales of $260 million to $270 million, we expect adjusted EBITDA between $48 million to $56 million. This includes gross margins just under 60% merchandising and advertising of 10 five two.
11% as a percentage of net sales and SG&A of 31 to 32 as a percent of net sales. We estimate net income to be 29 million to $33 million. This includes approximately $1 5 million of nonrecurring incremental expenses associated.
With our restatement of prior period financial statements. We estimate diluted income per share is expected to be $1 77 to $2.02 with $16 6 million diluted weighted average shares outstanding now for the full year fiscal 2024.
We are tightening the range of our full year outlook for net sales to $710 million to $720 million. We expect adjusted EBITDA between 54 million and $62 million. This includes gross margins of 57 to <unk> 57, and a half merchandising and advertising.
Approximately 13% as a percentage of net sales and SG&A of approximately 38 as a percentage of net sales.
We estimate net income to be between 22, and 26 million. These fiscal 'twenty 'twenty. Four estimates include four five to 5 million.
Of nonrecurring incremental expenses associated with our restatement of prior period financial statements. We estimate diluted income per common share in the range of $1 35 to $1 60.
And approximately $16 5 million estimated diluted weighted average shares outstanding as a reminder, the 50 <unk> week in the fourth quarter is expected to contribute approximately $6 million in net sales quickly.
Quickly on our cash balance outlook, we were very pleased to have reported such a strong cash position for the third quarter, which is typically our lowest quarter ending cash balance of the year given the inventory build ahead of the strong holiday sales period as we monetize inventories through the busy season, we continue to estimate we will end fiscal 'twenty.
Four with a higher net cash balance than we ended fiscal 'twenty three.
So in conclusion, we're pleased with our third quarter results and how early holiday sales have supported the continuation of competitively superior results as is reflected in our outlook.
Market share gains strengthening foundation exciting new growth drivers and our healthy balance sheet put love Sac in an enviable position the more I get to know the teams the more excited I get about our collective commitment to optimizing the opportunity ahead of us.
With a strong focus on growth underpinned by an ROI based approach to measured reinvestment I'm confident in the outlook now I'll turn the call back to the operator to start our Q&A session.
Thank you well.
Well now be conducting a question and answer session.
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One moment. Please we poll for questions. Thank you.
Our first question today is from the line of Maria <unk> with Canaccord Genuity. Please proceed with your questions.
Good morning, and thanks for taking my questions.
First recognizing that it's too early and you're not guiding to next year, but maybe can you talk about sort of your current expectations for the category growth in consumer demand next year, and what kind of macro assumptions are embedded in your sort of internal forecast for next year.
Hey, Marianne lovely to hear from you for the question.
Yes.
Obviously with police focused on quarter, four and the all important holiday season, we'll share more when we come through to our earnings for quarter four.
In terms of our plans for next year, we still anticipate the macro environment will be choppy.
And the cost will be remaining challenging and we have planned that way, but as we've done.
Zalviso this year last year, we need to obviously really outperform.
I agree with you driving tremendous growth and I think just so much of that goes to the fat brands right.
Frank continue to you know just really grout I think cat you know our customers even just being asked in show rates last week, you know they just love the brand they believe in design for life.
You know, we're planning to continue to be pragmatic food in terms of our investments with that of oversee a beat.
Oh, why but obviously as soon as the things ton you know we hope it will as the category start to you know improve that will be the ones that will be the fastest to be able to chase into that growth we saw it through COVID-19.
So we feel good and obviously, that's the advantage of our supply chain.
Yes.
This is Keith just to just to add to that a little bit I mean, that's one of the really really alluring aspects of this business model to me because of our approach not being merchandise led.
But primarily selling seats and sides and snacks with the various covers our ability to scale up with upside surprises to the macro.
It is really advantageous.
Starting from a position of shipping in less than two weeks.
Even if we needed to.
Potentially extend that a tiny bit in order to if it was a it was a really material upside macro surprise, we could do so so we sort of retain the ability to participate in upside macro surprises in a way that I think you sort of unmatched.
Got it that's helpful. And then secondly, sort of you've made a lot of progress on gross margin expansion over the past couple of quarters can you maybe talk about your philosophy around preserving that margin versus maybe passing on some of the savings to the consumer to drive volume, especially with kind of here in the near term.
In this macro environment.
Sure I'll start off on this one so yeah. We've been we've been really pleased with this and there's a whole host of factors behind it that we walked through on the color that I walked through on the call.
<unk> earlier, and you can see as we get into fourth quarter with the guidance that we gave there. We're looking for continued gross margin expansion through the fourth quarter, let's call. It heavily rounded half to half the benefit year over year that we saw here in the third quarter.
But I think I would say this we've sort of settled in to where we think it is a healthy range for us.
Barring any material shocks, whether it's on inbound freight outbound freight.
As always potential for some type of systemic shock, but barring anything like that I think we feel pretty good about this then would it becomes for US is a balancing act across pricing across promotions across across managing all of those.
Inbound and outbound freight Cros, plus how we leverage our marketing and or you know are ineffective promotions, we offer through the financing through the loves that credit card. So put it altogether I think these feel like pretty sustainable and healthy levels for us again barring any systemic shock.
Got it thank you for the color.
Yeah.
Our next question is from the line of Brian Nagel with Oppenheimer. Please proceed with your questions.
Hey, good morning, guys.
This quarter.
Holiday season congrats.
Thank you.
We didn't close the first place I want to ask and I think it's a bit of a follow up just the prior gross margin question.
You mentioned in the comments.
It's also true that it's.
More promotional out there.
Got dropped so I guess is the question.
Product gross margins as we look at the results you put up today for Q3 and the guidance for Q4.
To what degree.
You were consumers react favorably to price promotions.
Much of a driver as you do that strategically how much of a driver of the business is not the comp.
Okay.
Yeah look I think promotions is a very powerful tool in our arsenal, especially given our high gross margins to begin with and.
You know the competitive nature of our unique products, we tried to be very strategic with them.
As your as you know, we're trying to build a business that's here.
For Forever for 50 years, you know, we're trying to build that.
Generational brand.
And a brand that means something and so we have long leverage promotions at.
You know fairly healthy levels because in this industry in particular.
It's a considered purchase and so.
People spend quite a long time researching products researching competitors research our product.
Before they make a decision to purchase and what we found especially during the holidays is while we are our business spikes as we as we all know during Q4.
Uniquely in our category loves Shaq.
And sometimes we look at that you know is that a is that a blessing or a curse them, but we enjoy the extra business that comes by the exposure being out there in shopping centers.
During this time of year, when when theres foot traffic et cetera, but actually most of those sales.
As we observe them and as I observed him in the wild.
On the front lines in showrooms come from these considered.
Yes.
Processes, where where customers are weighing the value and then frankly, they leveraged the holiday season to push them over the edge and make that make that purchase finally for themselves.
It is it actually most of the time, it's not a gift or even related to gifting. It's just.
Kind of a side.
Psychological excuse to purchase and so during this time of year in particular.
The way that we manage promotions is really critical.
Because we have people that have been shopping US you know maybe throughout the entire year and finally pull the trigger and are waiting to see if they might get better et cetera. So we've exercised or I think a pretty disciplined hand this season, particularly because it's maybe the most promotional season, it's ever been.
That that you know at least in recent history, given the given the industry right now and so our promotions are lower than what we observed a.
By really any of our competitors and as you can see by the numbers. We are competing very robustly I think.
We have the strongest growth in the category.
And so we think we have that right balance of promotion.
And healthy fundamentals in the business for the category right now and the nice thing is.
Should things.
In the category get worse or just continue to languish, we have a strong opportunity to leverage promotions further to drive the business if necessary, but you know, we're we're not chasing business to chase business.
Again, we're trying to balanced building a brand that people can love and trust them and have consistency as well as of course compete in real time and generate cash and generate profits.
Turns for investors.
I think Sean just maybe Bryan to add a little bit more I mean, what we see as well is you know consumers they love the D O N E.
Did that deal, but it doesn't mean about the lowest price and we've said before a nearly 40% of consumers that come into to our brands. They don't even come up.
With anyone else. So we feel very good in terms of gross margin kind of being maintained.
We have been doing some selective price increases in places like Atlanta out, particularly on a more premium sales and we've seen a great performance from that so you know we're constantly testing believes that we have available and as you can see.
From our results you know gaining huge market shares outperforming Africa else. Then you know this algorithm has been working for it you know we saw from Goldman Sachs Report yesterday.
The promotional level, you know with a high court.
We get about 40% and at a similar level through November and we are substantially so that's something I think again just that.
But we do feel good on the gross margin.
That's very helpful. Very helpful. My follow up question.
Great topic. So I think it was Mary I think you were talking in your comments just about the.
Highlighting the ongoing success of the relationship with best buy.
I know I know you you always go as a company very guarded about your future plans, but I mean should we expect.
I guess, a newer distribution type partnerships.
With companies like best buy to help basically get litho website products out there.
Yeah.
Well before I think you know where we've always wanted these best in class partners.
Yeah.
Really on their mind.
Could be.
Okay.
But yes, so cook has always been an incredible partner alright.
Exactly right.
Oh neat tack to the there's no one better to partner with the best Mike do you want to be with that.
Oh, Yes, you know we've continued to expand our relationships best buy in and more to come in will sham or obviously are they and they see it.
We are gaining share that very happy in terms of are they chip.
And want to continue to advance it and then we're always considering Brian in terms of any other.
Best in class partners that we should be partnering with as you consider the whole ecosystem, whether it be two rooms, whether it be Costco I, you know rather than the E com.
I'm, just where should we be E and I'm glad I suppose that stuff, but you know always on our mind strategically, but very thoughtful how we do it and to ensure that we really are.
Right the way that we believe and consumers expect to find us.
Very helpful.
Congrats again happy holidays. Thanks.
Thank you Brian Thank you.
Yeah.
The next questions are from the line of Matt Koranda with Roth and Kam. Please proceed with your questions.
Hey, guys. Good morning, Thanks for taking the questions.
Just wanted to spend back to the Black Friday cyber Monday commentary of the holiday commentary in general that you had.
Just wondering if you could maybe speak to sort of consumer behavior that you're observing one of the things we've seen sort of quarter to date from a number of folks is that.
Consumers seem to be responding to promotions within kind of sitting on their hands between those promotional periods I'm. Just curious if that's the trend that youre seeing and then any willingness to sort of quantify the black Friday cyber Monday growth and you said I know you mentioned.
Record days in our record weeks, but any further quantification would be appreciated there.
Yeah no. Thank you for the question, Matt. So I think first thing, let's see if we were in <unk>.
Credibly happy with outperformed.
I bet five as you mentioned.
And from all industry report, we know we outperformed the category significantly upon a lot of market share.
In terms of dynamics all of all channels contributed to the strong performance. It really felt like we were back to 2019.
Fantastic.
<unk> e-commerce growth well into the late evening.
It was the right thing back in the frontline I think.
So can see them coming in the.
The research was very focused in what they wanted to buy.
You know and as we said with you back at the last call a month ago, we're not seeing anything in terms of trade down.
Or are you know some trade out particularly into fill but also just storage.
Seats and the other things that I'm really.
Really tried to say is as to what you know that continued financing.
All continued.
Because you talked about.
Well people waiting for sure and we saw that across the industry with.
Are those coming out with deals you know even earlier than Halloween.
Yeah, we were.
Later, we promised that we gave them the best deal and we are holding to that than we did.
So what you see a little bit more of that pent up demand coming which is obviously you know what the results that we said so super happy from from let's say everything we've done and we've baked all of that control in pillar guidance for this year you know what I said at the white protested.
But it was a you know obviously amazing to see the performance then that just really reinforcing the button right.
And just a great job tav teams I mean, managing post record that he says they're all little showrooms with incredible productivity. It was great to see them and they did an amazing job.
Okay very helpful. Mary Thank you and then.
Maybe for Keith just on the gross margin wanted to attack it from a different angle. So in the third quarter, you had an upside surprise versus sort of the commentary that you had last call.
Just wondering what drove the upside and then for the fourth quarter in terms of product margin are we baking in.
Or headwind.
In that sub 60 outlook that you talked about just maybe you can talk about the bridge, especially as it pertains to the product margin in the fourth quarter. Thank you.
Yeah sure so starting with the third quarter, and where maybe some of that upside came from.
It gets back to what Mary was saying, which is we've been seeing some decent premium upgrades things like gloves off things like storage.
Storage seats and add ons, along those lines as.
As well as a little bit more shift towards <unk> within the mix of product versus where we might have been.
Surgical price increases we've been taking on certain of those.
Products has also been beneficial it's not been broad based or or or materially large in terms of price increase but put the whole package together in that guide us a little upside on the quarter.
When you're thinking about fourth quarter really what's happening is we're lapping some of the abatement of the inbound freight costs that were really pressuring last year. That's why we're seeing less of a year over year benefit into Q4, it's more the easing of the.
All of the tailwind on a year over year basis.
What's causing that deceleration and expansion.
You'll notice that like you know, we do get a higher absolute gross margin in Q4 than Q3, because we do get some leverage the higher sales gives us some leverage over things like warehouse costs, and so on and so forth, but that's why what I was saying earlier was when we think about Holistically, where we are in gross margins here in these.
High fifties this feels like a good level.
For a full year basis for us and barring any systemic shocks.
I think the way the business is trending you know we feel good here.
Yes.
Okay, much appreciated and best of luck for holiday guys. Thanks.
Thank you.
Our next question is from the line of Alex Fuhrman with Craig Hallum Capital. Please proceed with your questions.
Hey, guys. Thanks, very much for taking my question and congratulations on a really strong year you know Mary I think you mentioned a couple of times and Sean touched on as well that you set new records for each days and weeks here during the holiday season. So far you know you guys have done a really good job historically.
Over the last couple of years of being able to handle those volumes without any kind of shipping delays or anything like that but can you talk about the profitability of those orders on peak days are there any incremental costs that you start to incur when you're operating near your peak capacity and would it be more profitable if there were ways to.
Smooth out demand a little bit more.
Yeah no. Thank you Alex Great question yesterday, it was a phenomenal thing those record performance as you know the team at plans for everything and that as we go through different scenarios and working with all of the thing.
And as you know we.
Perm fill that capacity, either therefore, I'm there wasn't any incremental cost.
You know that really came in.
So from that side slightly yeah, you know to what we planned for and and did a great job smoothing that through I think the second piece.
You know as we think about them.
We talked about predict spring, we completed that full rollout.
Significantly improving the speed of transaction with the when you have five or six customers.
No room on those peak days or even mall, just having that be needs and the technology to be able to transact has really really helped us.
The web performance.
Customers often choose to then you know.
Come back home and close the sale of it. So again, it's back to the kind of reinforcement of the Omnichannel model, but nothing that we see in terms of any profitability impact it was absolutely planned.
Okay. That's really helpful. Thank you Mary.
Thank you Alex.
Our next question is from Thomas Forte D C.
Yeah.
Great, Thanks, Shawn Mary and <unk>.
Congrats on the quarter and some strong start to the fourth quarter.
So two questions. The first one is can you give your updated thoughts on your ability to generate free cash flow and your thoughts on what you intend to do with the free cash flow.
That's the model.
Yeah.
Absolutely so.
And I appreciate the question. Thanks, So we're going to.
We're looking to provide more details about this with Q4 earnings when we get into the outlook for next year, but I think little bits and pieces of everything we've been talking about are sort of you know.
No.
Turning to lay the foundations for how we're going to approach. This on a go forward basis, which is as we transition into.
Generating more substantial free cash flow off of seats and sides and sex.
It's how do we how do we appropriately balance the reinvestment into future sales growth drivers with other options for that cash flow. So we fully anticipate ending this year, having been in a cash generative position.
All new systems, and other tools and optimization programs are being put in place all the time.
You know we are going to balance that.
Sean has said as Mario said and I have set against those future sales drivers our goal is to.
Translate more of the topline growth to bottom line growth going forward.
That should create more cash flow.
Out of the business, which we can use strategically along those balance lines I was just talking about.
Great. Thanks, Keith and then you've pretty consistently generated.
A lot of market share gains Sean you've talked in the past about your ability to consistently outperform the market as you know a high teens, perhaps low 20 percentage point rate.
I wanted to talk about the sources of market share do you feel like you're getting market share from the same players or do you think it's changed over time.
Okay.
Yeah, that's a great question.
It's hard for us to know for sure but.
You know our observations on the category.
We tried very hard to stay abreast of.
Every player who sells couches you know that's our core business and therefore, any any firmed that sells couches we consider.
A competitor and we track them all I think that.
Two I think there is kind of in our in our world there are two.
Main buckets.
Competition and remember of course, we are operating at a certain price point.
But just brand livestock stretches across broad I think fairly broad demographics because.
You know we can sell to the very high end customer who had a massive home and is excited to put a twin T. C factions with style tech in there in their basement or or or entertainment room.
And we can sell to a middle America.
This is their main piece of furniture, and we pull them up to our price point through the real value that <unk> created.
And so we compete with all of the established brands and home.
That we maybe be in the mall death or otherwise.
Compete with brand, new startups, who kind of copycat.
The <unk> format, modularity et cetera, and try to mimic that value prop.
And so I think that you know in this environment, we're taking market share from all of them.
And as you can see with most of our competitors negative growth and and obviously a positive growth.
We are certainly taking market share so I think that it ebbs and flows based on the health of that marketplace and for instance, I think that in startup land.
Capital is much more dear than it was over the last number of years and so we you know, they're not spending and necessarily the same waves across the board.
And you know just chasing growth and and I think the incumbents have some of their own problems to deal with in this environment, where there's still a massive hangover in the in the home category. Meanwhile.
No we have very low.
The within the category that is the counter this category is known for very low aided awareness and it's very fragmented.
And so we are taking market share.
Based on the competitors' unaided awareness.
It's hard for furniture brands to game.
Real brand awareness because.
Consumers.
<unk> from furniture brands and home brands.
Radically and sometimes with years in between.
And therefore, you know as you observed love shocks strategy of building a brand in between you know leveraging pop culture.
Being in the zeitgeist through celebrity Influencer of course are very sticky brand name all of these things give us strength, where I think many of our competitors are.
Can't can't mimic that aspect of what we do and how we do things and I think the Sac is a major player in establishing that brand. So for all these reasons I think that.
I think that we certainly are taking market share, it's hard for us to pin down exactly where where and who it's coming from and I think that does change based on the state of the category, which also has been in flux recently.
Great. Thanks for taking my questions.
Great to hear from you.
Thank you.
Reached end of our question and answer session and I'll hand, the floor back to management for closing remarks.
Yes. Thank you so much for joining the love Sac.
<unk> conference call for fiscal 2024, we look forward to.
Again at the wrap up of our fiscal year and we want to just thank investors and all of the hashtag love Sac family for building. This brand that we hold so dear.
This will conclude today's conference you may now disconnect. Your lines at this time. Thank you for your participation.
Okay.