Greetings. And welcome to The Lovesac Fourth Quarter Fiscal 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rachel Schacter of ICR.

Thank you. Good morning, everyone. With me on the call is Shawn Nelson, Chief Executive Officer; Jack Krause, President and Chief Operating Officer; and Donna Dellomo, Chief Financial Officer. Before we get started, I would like to remind you that some of the information discussed will include forward-looking statements regarding future events and our future financial performance. These include statements about our future expectations, financial projections and our plans and prospects. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the company’s filings with the SEC, which includes today’s press release. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today and we undertake no obligation to update them except as required by applicable law. Our discussion today will include non-GAAP financial measures including EBITDA and adjusted EBITDA. These non-GAAP measures should be considered in addition to you and not as a substitute for or in isolation from our GAAP results. A reconciliation of the most directly comparable GAAP financial measures to such non-GAAP financial measures 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 Lovesac Company.

Thanks, Rachel. Good morning, everybody, and thanks for joining us today. I will begin today’s call by discussing the financial highlights of our fourth quarter and full year results. After which I will review the key operational highlights for the year and the long-term opportunity we see for our brand. Then, Jack Krause, our President and COO, will elaborate on our operational accomplishments and outline our key growth initiatives for this year. And finally, Donna Dellomo, our CFO will review our financial results and a few other items related to our outlook in more detail. We had a strong fourth quarter and are very pleased with our financial results. Net sales increased by 64.4% to $64.2 million. Total comparable sales which includes same showroom and Internet sales increased 52.2% driven by a strong showroom comp increase of 43.5% and significant growth in our Internet business of 76.9%. Our fourth quarter fiscal 2019 comparable sales were again driven by both transaction and ticket growth, as we continue to attract both new and existing customers alike through our digital marketing strategies, growing e-commerce platform and expanding showroom and shop-in-shop presence. Adjusted EBITDA was $10 million for the fourth quarter versus $6 million for the prior year period. We achieved this year-over-year improvement despite significant increase in marketing spend of $1.8 million and a decrease of approximately $1.2 million in other non-recurring financing expenses over the prior year quarter. For the year, we delivered on the financial expectations we set for ourselves of achieving a high sales growth rate and improved EBITDA on an annual basis. Net sales increased by 62.9% to $165.9 million. Total comparable sales including same showroom and Internet sales increased 43.8%, driven by a showroom comp of 35.2% and growth in our Internet business of 75.1%. Adjusted EBITDA was…

Thank you, Shawn, and good morning, everyone. As Shawn said, our fourth quarter was a strong end to a robust year of sales growth with good operational progress made against our key priorities. Let me give you an update on our progress and plans for the year. Our first priority is expanding digital TV, direct mail and social marketing to increase brand awareness and drive sales. Our marketing strategies continue to be very effective and are yielding great results as evidenced by our comparable sales growth of plus 76.9% for e-comm and 43.5% for showrooms in the fourth quarter. Our first year customer value or CLV, which is a measure of the first year someone is The Lovesac customer, hit a record of 1,540 in fiscal 2019, up from 1,206 in fiscal 2018. As expected, in fiscal 2019, our customer acquisition cost or CAC increased to approximately $309 from $283 in fiscal 2018, as we increased marketing to drive brand awareness including our first ever national TV campaign for Labor Day. For the year, we increased our year-over-year marketing expenditures by nearly 100% to $18.4 million and our CLV to CAC ratio finished the year at 5x, which is indicative of our ability to efficiently scale. We continue to be very pleased that our CLV far exceeds our CAC and we expect this trend to continue as we expect our increased marketing investments that will drive CAC higher will be accompanied by CLV increases. Other key metrics that highlight the effectiveness of our marketing are the 56% increase in new Sactional customers and also the 38% of transactions that are driven by repeat customers for the fiscal 2019 year. The ROI on our marketing efforts remains extremely attractive in markets with and without a showroom, which we saw again in…

Thank you, Jack. Good morning, everyone. I will begin my remarks with a review of our fourth quarter and fiscal 2019 results and then provide some commentary around our thoughts for fiscal 2020. We are very pleased with our Q4 results, which marks a strong end to fiscal 2019. As a reminder, the fourth quarter of fiscal 2019 was a 13-week period, compared to a 14-week period in the fourth quarter of fiscal 2018. Net sales increased 64.4% to $64.2 million from $39 million in the prior year quarter. This sales growth was driven by strong showroom, Internet and shop-in-shop performance with an increase in new customers, as well as an increase in the total number of units being sold, reflecting a higher average order volume per customer. Also, our advertising and marketing investments, which drive brand awareness and an increase in the number of showrooms helped fuel our Q4 sales performance. Comparable sales, which include showroom and Internet sales, increased 52.2%, comparable showroom sales increased 43.5% and represents our ninth consecutive quarter of positive comp showroom sales increases. Internet sales increased 76.9% versus an increase of 55% in the prior year period. We opened no new showrooms, remodeled four legacy stores into our new showroom format and had two showroom closures during the fourth quarter. We ended the year with 75 showrooms. Looking at our results by channel, showroom sales increased 52.3% to $43.5 million. Internet sales increased 76.9% to $15.2 million and our other channel, which includes our shop-in-shops in Costco locations increased 191.1% to $5.4 million. By product category, our Sactional sales increased 66.5%, our Sac sales increased 61.7% and our other category sales, which include decorative pillows, blankets and other accessories, increased 47.2% in the fourth quarter as compared to the prior year quarter. Gross profit…

[Operator Instructions] Our first question comes from the line of Dave King with ROTH Capital Partners. Please proceed with your question.

Thanks. Good morning, everyone.

Good morning.

Good morning, Dave.

First -- hey. So maybe first, sticking with the guidance commentary a bit, Donna, you talked about the margin pressures and marketing deleverage in Q1. I guess, how should we be thinking about the revenue growth in the first quarter versus the 40% to 45% annual pace, I think, you laid out, you are going to have National TV this year, I think, versus not having it in the first quarter last year. Just how should we be thinking about that?

Hey, Dave. This is Jack. I will take a little -- I will take the answer first, just because it’s more of a revenue topline. I think we are going to see pretty constant growth throughout the year, perhaps on an annual -- on a first half versus second half a little bit lower in comp performance, but two-year comps are going to be significantly stronger in the second half. Because the combination of obviously we are lapping over regional advertising in the first half with national in the second half -- with national in the first half and as we get into the second half, we see a lot of opportunities in terms of netting efficiency gains with some of the testing we are doing and we are just getting a lot smarter about marketing into the holiday period.

Okay. That helps. And then maybe on that marketing spend Jack, are you still getting the same level of ROIs, on TV, for example, I think, you -- previously you talked about 75%, is that still the right way to be thinking about that, has that improved over time?

Well, I -- what I would tell you that right, the fourth quarter ROIs were the strongest we have had. I don’t want to get into too many details on numbers, because of attribution makes it hard to give you an overall program ROI that’s apples-to-apples, but we are very, very pleased and overall as the company, the ROIs are the strongest we have ever had.

Okay. It is great to hear. And I guess just one more from me. On the Costco business, can you talk about how that’s performing, is the revenue per day there still increasing and then what sort of visibility do you have in the future gains there, it sounds like you already sort of have the road show number kind of in plan, is that something Costco has shared with you? And then a follow-up to that is, how should we think about the potential for future shop-in-shop relationships beyond Costco? Thanks.

Okay. Great question. So, obviously, with Costco, we mentioned the growth from last year and I think Donna did outline the number of shops -- shop-in-shops we will do this year. We did see in the fourth quarter increased productivity. So it’s sort of like a comp shop-in-shop number of about 30% increases and we think that was obviously driven by our increased awareness in advertising that we implemented in the fourth quarter. In terms of thinking about the future of the business of shop-in-shops. Clearly, we do have some growth opportunities with Costco, with really the frequency of shops, and perhaps, some expansion into other areas in the mid-term. And in the near-term also, we are investigating opportunities for other partnerships because we believe this is a really effective way of creating awareness with low CapEx spend if we find the right partners.

Great. Great to hear. Thanks for taking my questions and nice quarter.

Thanks.

Our next question comes from the line of Camilo Lyon with Canaccord Genuity. Please proceed with your question.

Thank you. Good morning, everyone. Great job. Nice quarter.

Good morning, Camilo.

Donna, I was hoping that maybe you could provide a little bit of color on the components of your 40% to 45% sales growth this year, as we should think about the difference between your Internet growth expectations versus your store comps. If you can provide any sort of shape to that, that would be great.

I will start this out and then I will let Jack finish the sentence. But essentially it’s the 15 to 20 showrooms. It’s the continued investment in marketing. It is the increase in our shop-in-shops that we are doing with Costco. It’s the increase in our Sactional business what drives greater AOV. So it’s really the combination of those four things that are driving. And to Jack’s point, it’s the two-year comp which is very -- we will say we are very happy about what the two-year comp is showing us. So all those factors together is what essentially is driving that 40% to 45% increase in revenue year-over-year. Jack said that’s good.

Okay. I guess just moving to the inventory piece. Just a little bit, if you could just give a little bit more color on the composition of that inventory and as how you -- because I think you could carry a decent amount of on hand inventory to have that quick delivery time. So if we are seeing inventory up over 120%, how should we think about that enabling you to either achieve or surpass your sales growth objectives?

Yes. So we did make a conscious effort in fiscal 2019 to build those inventory levels to make sure that we can ship as quickly as possible and remain in stock on all SKUs. So last year, you saw that big build of the 125%. We do not expect to see that significant increase this year, although, we will see an increase to support our multiple distribution facilities strategy, but it will not be to the extent that you saw in fiscal 2019. But it did allow us to especially make sure that we can ship as quickly as possible to our customers in addition to handle inventory on hand for the marketing to pull the levers on some testing -- test marketing. And as Jack mentioned earlier we are seeing the ROI on those marketing investments to really be very positive for us. So, all combined, we just want to make sure that inventory doesn’t become an issue at all for us to be able to support the company’s growth and our marketing initiatives. So I think we did a tremendous job in fiscal 2019 to make sure that we supported all of those initiatives. So we won’t see that growth in fiscal 2020 year-over-year.

Yeah. And just to add some flavor to the inventory growth, we have, obviously, we have a really fantastic model in terms of the way our SKUs are managed and we have really no seasonal products in all core SKUs. So relative to a lot of other companies and merchandising strategies, this growth in inventory is at very low risk of becoming outdated and unusable. So it’s really key that we especially as a high growth company bet into our core product inventory at this point.

Yeah. We have or we maintain inventories on our flagship covers, which are strategic into our best selling covers and then pretty much be concede, right?. So, to Jack’s point, we are not a merchandiser of inventory or inventory is active in our inventory grows.

Yeah.

Got it. That’s great color. And Jack, my last question is on just general shop-in-shops, we used as a example. As you think about increasing your footprint with them this year versus last and how that marries with your brand awareness rising. How do you -- at what point do you start to -- at what point does the math start to become more favorable to open up your own stores as opposed to having a third-party partnership with someone like Costco so that you can really fully capture that entire margin. How do you think about the balance of those two components as you think about wholesale partnerships versus your own distribution?

I think that’s a great question and it really speaks to an ability to reach a target customer or a desired customer group that we are not as effectively getting at this point in the short run. I would absolutely say in the long run, when we see opportunities in high density areas, we will continue to use our learnings from areas that aren’t supported by showrooms, so for example, e-comm penetration, as well the shop-in-shop performance as indicators in our long-term plans in terms of the potential geographic areas. So we will certainly and are certainly looking at those as indicators of future opportunities in terms of investment in those areas.

Got it. Thanks very much and good luck guys.

Thank you.

Thank you.

Thank you.

Our next question comes from the line of Alex Fuhrman with Craig-Hallum. Please proceed with your question.

Great. Thank you very much for taking my question and congratulations on a really great year. I wanted to ask about the trade-off as you think about investing in new showrooms versus ramping up your national advertising program, which seems like it’s certainly been tremendously successful this year. Is one of those things kind of helping more than the other to bring in new customers or increase purchase frequency. I am just trying to understand, I mean, you are obviously opening a good clip of stores this year, it sounds like 15 to 20, which would be more than we have seen in quite some time for you. But I guess I am just trying to understand the puts and takes as you try to figure out how many showrooms are going to open and wonder why not maybe even more just given that you now have this national advertising scale and you have a great balance sheet, seems like you are able to do all of these things at the same time. I am just trying to understand kind of the puts and takes as you think about, which you want to be really leaning into whether it’s more showrooms or more advertising or both?

Yes. It’s a great question and I think given our growth and our lack of awareness and our lack of penetration in the country these are some pretty big variables that can change over the next couple of years. So we are certainly looking in terms of when we are looking at showroom potential growth, you know, what’s the long-term opportunity in that area and how do we look at some of these shop-in-shops and e-comm penetration as indicators of where we can go. I think that one of the things we look at with showrooms is right now, we are opening showrooms at about the highest run rate we have ever seen where our first year showrooms are running at almost $1.7 million versus two years ago $1.1 million, so they are incredibly productive. And when you are starting to see payback of less than two years, what you are really doing is investing really smartly and this -- what we call as the media amplifier. So we really think of showrooms as media amplifiers and so how we look at it is what that’s payback period and then what’s the potential obviously long-term response of having that showroom amplifying the effect of media, because we are seeing in areas where we have showrooms versus not, 6x return on the marketing investment. So we have to look at them as what’s really the synergy between the two and the cost of CapEx versus one versus the other. There’s really a synergy that we need to think through and look through a longer lens of five years to six years. If it’s an area that has high population density and it’s a great location, clearly we know the long-term is to have a showroom there.

Great. That’s really helpful. And then if I could just ask quickly, I think, it was mentioned on the call that you are looking at potentially partnering with some other retailers in addition to what you do with Costco, would that be a similar pop-up kind of format or are you potentially looking at having permanent year round stores within another retailer?

At this point, there are several options on the table and as soon as we have material information to share we will get back to you.

Okay. That’s great. Thanks very much.

Thank you.

Our next question comes from the line of Sean Henderson with D.A. Davidson. Please proceed with your question.

Good morning, guys. Thank you for taking my question today. Just really quickly I know everyone’s kind of touched upon your efforts with Costco and it’s been very successful so far. But just in terms of leveraging your relationship to potentially expand to some of its international warehouse locations, if you could provide some color on maybe what that would look like? That would be appreciated.

I would say Costco is certainly number one from their perspective. I am sure they would agree that they are very pleased with our performance and are very interested in pursuing some expansion. What we have to do is make sure that we have the right infrastructure and are adhering to the right regulations in order to expand to other countries. We will be able to give you updates on that area in the next several quarters. I think we will have a better opportunity to fill you there.

Yeah. Great. Thank you.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Shawn Nelson for closing remarks.

Thank you so much for joining us. We appreciate all of the support from all our investors and we intend to just keep going.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.