The Lovesac Company (LOVE) Q4 2020 Earnings Report, Transcript and Summary

Greetings. Welcome to the Lovesac Fourth Quarter Fiscal 2020 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] Please note this conference is being recorded. At this time, I’ll turn the conference over to Rachel Schacter of ICR. Rachel, you may now begin.

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 discussion of these risks and uncertainties, you should review the company’s filings with the SEC, which includes today’s press release. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today and we undertake no obligation to update them except as required by applicable law. Our discussion today will include non-GAAP financial measures, including EBITDA and adjusted EBITDA. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP measures. A reconciliation of the most directly comparable GAAP financial measures to such non-GAAP financial measure has been provided as supplemental financial information in our press release. Now I’d like to turn the call over to Shawn Nelson, Chief Executive Officer of The Lovesac Company.

Thanks Rachel. Good morning everybody and thanks for joining us today. I will begin my remarks by providing an overview of the company's response to the COVID-19 outbreak followed by a summary of fourth quarter and fiscal 2020 performance. Then Jack Krause, our President and COO will elaborate on our operational stuffs to navigate the current environment and outline how we are approaching our key initiatives for this fiscal year. Donna Dellomo, our CFO will then review our financial results and a few other items related to our outlook in more detail. As it relates to the Corona virus pandemic our number one priority throughout the crisis so far has been the health and safety of all our associates and customers. As previously announced on March 17 we quickly closed down all of our retail showrooms temporarily and began operating as a direct consumer web-only business. We paid all associates for the first three weeks of the shutdown. We then made the difficult decision to lay off all of our 445 part time associates or 57% of our total company headcount and took 20% pay cuts at the top executive levels with graduating cuts through our headquarters and then implemented numerous other cost saving measures. We are taking the point of view that nearly all expenses are variable at this time, prioritizing cash preservation and generation to strengthen our ability to navigate through what could be a prolonged crisis. Our website has performed very well in the face of the showroom closures year-to-date. Since closing showrooms on March 17 through April 12, our e-commerce point of sales transaction dollar have been up over 400% with total POS dollars up 3.6% versus the same period last year which included showroom sales. Thankfully because our [indiscernible] warehousing and distribution system has a share of the grocery market our distribution centers have remained open and are shipping Lovesac products in regular course even since the shutdown of many non-essential businesses in certain states. There are other key attributes worth noting that are unique to our company in business model that position Lovesac well to successfully navigate through this COVID-19 pandemic. Number one, Lovesac has a strong balance sheet with a net cash position of over $40 million in cash and $10 million in availability under the line of credit for a total liquidity of $50 million at the outset of the COVID-19 pandemic driven showroom closures. Two, we have an evergreen fully shippable product offering Lovesac's patented Sactionals are essentially the only full-size sectional and sofa products that can be delivered to the consumers door via common carriers like FedEx and our giant bean bags called Sacs have become synonymous with the video gaming and movie Binge watching lifestyles that are all about just being comfortable at home. We view the reality of so many families stuck at home as part of the possible expansion in demand for our products ongoing versus what we might otherwise expect in a tumultuous time like this. We have already seen tremendous lifts across both of these our major categories in Q1 to date of this year as reflected in the strong e-commerce performance I just discussed. Our inventory of these products is not seasonal. It never goes bad or become stale. So while we will adjust our inventory balances to fit the forecast, fluctuations in demand do not pose a markdown threat to us. Number three, we manage a very flexible marketing budget with no long term advertising contracts in place. As showrooms were forced to close we quickly retooled all marketing expenditures and communication tactics towards driving sales online and are seeing strong associated results. And before, Lovesac has an agile and lean operating model. Typical staffing model of our small footprint showrooms is five to seven associates of which only two are typically full-time. With our showroom closures and the subsequent layoffs of part-time staff we have quickly redeployed our entire army full of full-time associates to support online sales via Facebook live events, quote backlog outreach and podium technology interactions via text messaging that is proving to be extremely effective towards lifting online sales and has likely revealed new tactics we will employ even after showrooms open. The elevated success of our online sales so far throughout this period through these new tactics being employed further strengthens our ability to rapidly grow Lovesac share of a $30 billion U.S. upholstered furniture market while ultimately committing to as few physical showrooms as possible which has always been our goal. We expect increased negotiating power with landlords in the future. Number five, finally we continue to diversify sales channels for the future. We are excited to announce our new pilot with Best Buy as we expand our channel reach beyond our successful Costco partnership in Macy's pilot. Best Buy has already had three Lovesac shop and shops in market for the past 90 days as a test towards a larger program. While these are temporarily closed at this time, we are very pleased with the results thus far and look forward to seeing the program expand once retail broadly resumes normal operations. The Best Buy partnership is not just another sales channel to us that represents an important strategic alignment with our future product innovation efforts. Overall, we have been able to adapt quickly in the phase of crisis and for the above reasons we feel that Lovesac not only has the ability to successfully navigate through this unique period of time but because of the flexibility of our model we will be well-positioned to ramp back up slowly or rapidly as things normalize. Jack will discuss our Corona virus planning efforts which can be categorized in three key buckets; team health and safety, business strength and financial resilience. We quickly ranked and stack each possible initiative based on numerous factors and began to take action immediately even weeks before the closing of retail showrooms on March 17. We are aggressively managing all aspects of the business to conserve cash and preserve our financial health. We are working with landlords to minimize cash outlay for any showrooms we might still choose to open this year. We have worked closely with all of our landlords for rent and lease over the duration of the showroom closures and feel great about the cooperation and partnership overall. We are getting to offset much of that major expense line. All travel and entertainment, all expenses related to training, recruiting new hires which was significant given our growth rate, over time sponsorships, large format meetings and many other expenses have been indefinitely delayed or eliminated. Marketing spends have been adjusted to drive our business online focused on measurable ROI generating activities. Now a supply chain update. Lovesac’s manufacturing supply chain has been greatly diversified in reaction to the Chinese special tariffs. After some brief disruptions during Asia's bout with the pandemic things are back in full swing at the beginning of our showroom closings in mid-March. With China now well past their own Corona virus shutdowns we are seeing only limited delays with a few of our stock covers. Our supply chain across Asia is now more diversified than ever and going strong. We have Sactionals manufacturing now spread across Vietnam, Malaysia and China. We have fabric milling spread across Indonesia, Taiwan, India and China. We have cut and sew operations in Vietnam, India, China, America and soon Malaysia and Indonesia as well. While our third party custom order selling facility in Los Angeles closed a few weeks ago during California's shelter-in-place order custom order cover sales on the web have always been deminimis. So we expect no meaningful impact there. All Sacs continue to be stuffed, shrunken and shipped out of our third party manufacturing facility in Texas which has also been allowed to remain open through the shutdown due to some of its other more critical manufacturing activities deemed necessary. Our current supply chain now has plenty of redundancy and the product we do continue to manufacture in China is now subject to hefty negotiated discounts that largely offset the effects of the special tariffs. All of the products we have sourced outside of China are coming in slightly cheaper than first costs within China even before considering the extra Chinese tariffs. While these advantage cogs do begin to flow through in Q1 of this year, we have much tariffs late in inventory still in our warehouses that will need to cycle through to have it affect a reported GAAP gross margins and with increasing FedEx costs and other known headwinds we expect to recover at the gross margin line to get us back to that mid-50s range in a somewhat protracted manner we estimate it will require approximately eight quarters to fully recover to that mid-50s range in gross margin. While we are happy to have diversified outside of China so quickly we are grateful that a few of those key moves were in partnership with our long-standing Chinese factory owners, standing up facilities for us at their expense in Vietnam and Malaysia. These deep relationships become supremely relevant at times like these and our longtime overseas partners have already extended our payment terms by 30 to 60 or more days. We are confident that they will be willing to flex along with us as the needs of the business change as they often have over our long history together. Turning back quickly to our fiscal 2020 results. We had a strong end to fiscal 2020 as you saw from our earnings release. 2020 was a year of many operational milestones for Lovesac and we will build on this progress in fiscal 2021. One, we open 16 net new showrooms in FY 2020, a 21% year-over-year growth as we focus on growing the omni-channel Lovesac brand and amplifying our marketing investments with an expanding showroom presence. Importantly the returns on our showroom investment continue to improve and the payback period on our new showroom investments have improved to 13 months from 16 months. Number two, we expanded our CapEx life pop-up shop and shop-in-shop presence launching four Macy's pilot shop and shops which have performed very well so far. We operated 756 total pop-up shop 10-day events during the year at Costco, up from 553 events the year prior. Number three, we increased our marketing investment across digital channels, supplemented with traditional spend including TV and generated important learnings from our test and learn work. Number four, we continue to strengthen our moat and the inherent design for life appeal of our product offering with the introduction of the power hub and storage seed and finish the year with a strong 45% attachment rate and associated $150 increase in AOV on Sactionals because of these introductions. Number five, we made important investments across our business in fiscal 2020. Key among these were supply chain, systems and process investments as well as important talent additions as we focused on ensuring a solid foundation to support the significant growth that lies ahead for Lovesac. And number six, on the sustainability front, we continue to utilize only yarn spun from 100% recycled plastic water bottles diverting 28 million bottles from the waste stream in fiscal 2020 alone on our Sactionals upholstery fabric. We also began using reprieve recycled yarn in many decorative covers this past year. So in summary, fiscal 2020 was a year of many achievements at Lovesac and we made important strides positioning ourselves to continue to disrupt the $30 billion category of couches, chairs and seating. In response to the COVID-19 pandemic we swiftly pivoted our focus to prioritizing the preservation of cash and our financial health through these challenging times while also ensuring we are making important strides on innovation while standing ready to resume our growth and market share gains as soon as the situation permits. Finally, I want to thank our entire team for all of their hard working commitment. Every Lovesac associate has made personal sacrifices and has been working very diligently to pull together and drive our business forward successfully throughout these challenging times. With that I will turn the call over to Jack for more detail on our plans to navigate the current environment, FY ‘20 highlights and recovery plans for FY ‘21.

Thank You Shawn and good morning everyone. Our fourth quarter was a strong end to fiscal 2020 with good operational progress made against our key priorities. I'll begin my remarks by elaborating on our approach to managing through the evolving COVID-19 pandemic and then briefly discuss our progress on our strategic priorities for the year ending FY ‘20 and our plans for the upcoming financial year ‘21. First, on our COVID-19 plan, we have established a crisis management process and team to facilitate rapid decision-making in a systematic manner. We've organized cross-functional teams around three key pillars; one, team health and safety, two, business strengths and three financial resilience. First, regarding team health and safety. There are a number of moves we've made very quickly as soon as we learned about COVID-19. As previously announced we closed all showrooms on March 17 and paid all full-time and part-time associates through their scheduled hours through April 5. Our headquarter staff is working from home until further notice. We have been cascading information daily to our entire team with an online resource center for employees updated regularly in addition to our special bulletin from HR as well as the leadership team. The team is developing this strategy in cadence to safely reopen showrooms when the timing is appropriate. On the business strengths front, we've been working on a number of initiatives to adapt and leverage our resources and a key pivot our full-time showroom associates have been active with customers using podium, a chat technology that enables our associates to help guide customers through the buying process from remote locations at home. This technology enables all of our associates to essentially become remote based selling and customer service agents across the whole country. In the past two weeks alone, our associates have engaged in thousands of chats with customers and have done product demonstrations on Facebook that have had over 100,000 views. We are pleased to say that the full-time showroom associates have generated more than enough revenue to cover their payroll during this period. We will continue to refine and expand this approach as we test and learn new ways to best help our associates serve customers within our omni-channel model. We've increased our communication focus on the Lovesac value-added services including free shipping returns as well as risk free trial periods that we routinely offer in an increased availability of swatches that allow customers to feel more comfortable in purchasing furniture without physically experiencing it. This is increasingly important particularly in the current environment we're in. We have seen a surge in overall social media use as a result of the COVID-19 crisis across Facebook, Instagram and Pinterest platforms to name a few. As a result we have pivoted our spends and messaging accordingly. We are pleased with the increased efficiency of Lovesac on Pinterest and Facebook campaign in the past month. This has been driven by refined audience targeting strategies, creative enhancements, platform optimizations as well as automated bidding and restructuring of our targeting to focus on core audiences. We're also leveraging direct customer tactics aimed at helping customers at home with live demos of our products scheduled multiple times a week on our Facebook page and the increased availability of swatches that I mentioned earlier. We are very pleased that these efforts are having a big impact on our ability to deliver sales without showrooms. Since our showrooms closed on March 17 through April 12 our e-commerce POS transaction dollars have been up over 400% with total company POS dollars up 3.6%. Last week we also showed our strength on executing large volume of events in the absence of showrooms. Our Easter flash event drove the total company POS dollars of 6.7 million which was actually 7% comps over last year's Easter event with product margins just 60 basis points below last year. These results give us the confidence that we can continue to pivot and successfully navigate this tough environment. Given this recent success and the cost savings measures Donna will provide a more detail, we believe that we can operate for the balance of the year without showrooms on a cash neutral basis. Donna will discuss the third pillar financial resilience in a moment. Turning to our fiscal 2020 operational progress, Shawn discussed product innovation, the success of the store seat and the power hub introductions are a testament to the power of our platform approach to product innovation and we look forward to building on the success going forward. With only 1% brand awareness and the strong and growing ROIs and our marketing activities we continue to lean into marketing in this past year. A customer lifetime value or CLV hit a record of $1835 in the fiscal 2020, up from $1540 in fiscal 2019. As expected in fiscal 2020, our customer acquisition cost or CAC increased to approximately $390 from $309 in the previous year as we increased marketing to drive brand awareness through both TV, digital and social marketing efforts. For the year, we increased our year-over-year marketing expenditures by nearly 59% to $29.2 million and the CLV to CAC ratio finished the year at 4.7X from 5.0X in the prior year, demonstrating the continued effectiveness of our spend even as we scale dramatically. Importantly we continue to expand our targeting and segmentation work to drive increased relevancy and in Q4 introduced dynamic video into our digital ads in a virtual demo on our website to further improve digital shopping experience. Next, showroom openings. Overall sales per square foot for our showrooms reach an all-time high in the year at $2083, an increase of 22% over last year. Our new showroom productivity continues to be excellent with our 2019 class generating a payback of 20 months at the four wall contribution level. This type of productivity continues to give us flexibility in our location and lease strategies. Showrooms are a key to our growth strategy and they serve as meaningful brand amplifiers and generate outstanding returns. That said in fiscal 2021 our new showroom plans have been impacted by the events related to the COVID-19 pandemic. When conditions allow we will reopen existing showrooms and resume our showroom expansion. It is important to note that our highly productive showrooms depend on low levels of labor to operate since we don't manage merchandising assortments, slows selling stock or incoming shipments associated with a typical store model. On pop-up and shop-in-shop expansion in fiscal 2020, we launched a pilot of our four Macy's permanent shop-in-shop locations in LA. Atlanta, New York City and Long Island and we are very pleased with their performance. In addition, we are pleased to announce that we open three pilot locations in the fourth quarter with Best Buy, Mount Laurel, New Jersey, Plymouth Meeting, Pennsylvania and Tuttle Crossing which got off to a very strong start. This shop-in-shop format continues to provide us with exposure to new customers in a capital efficient manner and allows customers to see and touch and feel our products before purchasing. The successful launch of these pilots gives us the confidence that we can use this model to expand our footprint in a highly efficient manner. Our pop-up shops with Costco continue to prove successful in fiscal 2020. We operated 756 pop-up shops in combination with four online road shows. These Costco locations drove significant increase in our other channel sales up to $29.6 million versus $19.7 million in fiscal 2019. Pop-up shop productivity increased 8% for the year. In fiscal 2021 as soon as conditions permit we expect to continue our Costco pop-up shop locations and also continue to explore the shop-in-shop format with other retailers given the positive results we have seen thus far. Shawn provided an update on our supply chain progress. As he said in fiscal 2020 we diversified sourcing while investing and distribution infrastructure this past year. We increased our distribution capacity by securing multiple warehouses and additional processing labor, improve the reliability of our suppliers in terms of orders received as planned, improve the accuracy of our shipments to customers and we improve system integration between supply chain, our carriers and our 3 PL distribution centers. So overall we made good progress operationally in fiscal 2020. As we look ahead we'll remain disciplined with expenses and capital with a focus on preserving our financial health in the current environment while positioning the company to quickly and efficiently ramp up once conditions allow. With that I'll turn the call over to Donna to review our Q4 and full-year financials, provide a quick summary of the financial resilience team work thus far.

Thank you Jack. Good morning everyone. I will begin my remarks with a review of our fourth-quarter results and then provide a framework for how we are approaching fiscal 2021. The 43.6% increase in net sales to $92.2 million was broad-based and driven by strong performance across all channels including new and comp showrooms, e-commerce and our other channels which includes pop-up shop and shop-in-shop sales. Successful digital marketing strategies drove an increase in both ticket and transactions and we saw increases a new customer count as well as repeat purchases. Please refer to our press release for details on our comparable sales performance and new showroom openings. Looking at our results by channel for the first quarter, showroom sales increased 31.9% to $57.3 million. E-commerce sales increased 73.9% to $26.5 million and our other channel which includes our pop-up shops in Costco locations and shop-in-shops and four Macys pilot locations increased 53.1% to $8.4 million. By product category our Sactional sales increased 73%, our Sac sales decreased 16.4% due to our own national advertising focus on Sactionals and our other category sales which includes decorative pillows, blankets and other accessories decreased 5.1%. The expected 630 basis points decrease in our gross margin was primarily driven by the 460 points headwind from tariff impact and an increase in flash sale promotions which were partially offset by reduced costs of our Sactional products. As a reminder, the timing of our tariff mitigation efforts and increased shipping costs is driving the temporary gross margin pressure as Shawn mentioned and we expect an approximate eight quarter recovery to our normalized gross margin levels in the mid 50% range. The increase in SG&A dollars excluding one-time items was driven largely by increases in infrastructure improvements, selling related expenses and stock compensation expense with the 320 basis points year-on-year improvement in SG&A rate driven by leverage on the 43.6% net sales increase. Our investments in advertising and marketing which benefit extended periods increased $5.3 million or approximately 330 basis points to 11.4% of sales largely due to an introduction of additional media involving the holiday season. Depreciation and amortization increased $900,000 from the prior year to 1.5 million principally related to capital investments for new and remodeled showrooms and infrastructure investments. In the fourth quarter of fiscal 2020, there were no adjustments to operating income which was $5.4 million compared to an operating income and adjusted operating income of $8.2 million and $8.3 million respectively in the fourth quarter last year. Our net interest income for the fourth quarter was $109,000 which reflects the impact of our IPO and other primary share financing. Tax expense in the fourth quarter of fiscal 2020 and 2019 was not material and was related to minimum state income tax liabilities. Before we turn our attention to net income, net income per share and EBITDA, I would like to point out that my discussion of these metrics will focus on net income and net income per share adjusted for the IPO and other financing costs as well as adjusted EBITDA. Please refer to the terminology and reconciliation between each of our adjusted metrics and they're most directly comparable GAAP measurements in our earnings release issued earlier today. Adjusted net income was $5.4 million or $0.37 per share in the fourth quarter of fiscal 2020 compared to adjusted net income of $8.5 million or $0.63 per share in the fourth quarter of fiscal 2019. Adjusted EBITDA was $8 million as compared to $10 million in the fourth quarter of last year. For details around our full-year income statement please refer to our earnings press release. Turning to our balance sheet, our liquidity remains strong as we ended the year with 48 million in cash and cash equivalents and $12.5 million in availability on our revolving line of credit with no outstanding debt on the revolver. Ending inventory increased 39% year-over-year driven by higher sales and increased in capitalized rate and warehousing costs relating to tariffs and increased inventory levels as well as an increased investment in the weeks of supply of inventory on hand. Free cash flow defined as cash from operations [less] CapEx was the use of $21.7 million in fiscal 2020 as compared to a use of $17.8 in the prior year with the year-over-year change driven principally by the approximate $5.7 million in net tariffs impacts in fiscal 2020. In terms of our outlook, given the uncertainty around the duration and trajectory of COVID-19 related disruption we are not providing an outlook for fiscal ‘21 today. As Jack and Shawn mentioned we are pleased with the strong e-com performance. We have seen that this has resulted in quarter to date total POS transaction dollar increase through April 12 of 30.8%. Post showroom closures total POS transaction dollar increase was 3.6% through April 12 versus the prior year. We are aggressively managing costs and cash outlays to current trends while ensuring readiness to resume full operations as soon as conditions permit. Traditionally, fixed expenses such as payroll are swiftly being reduced and occupancy and other expenses are being deferred. All variable expenses are being flexed to card sales trends. As of yesterday April 15, our quarter to date cash burn has been approximately $14 million versus a $10 million cash burn rate in Q1 of last year. Q1 is seasonably a cash burn quarter for us and while we have taken swift action on the cost side in response to COVID-19 disruption, the impact of these actions is not yet reflected in this cash burn rate. We would expect to be roughly cash flow breakeven for the remaining few weeks of Q1 to end the quarter with a cash balance of approximately $35 million and full availability under our revolver. As a reminder our revolver carries no financial covenants other than the requirement to maintain a million dollars of excess availability. CapEx is also variable this year and given the vast majority of our CapEx spend is related to new showrooms, delays on this front have a significant impact on CapEx spend. Depending on the timing of showroom reopening our new showroom opening plans for the year could range from 0 to 18. CapEx spend not including new and remodeled showrooms will be in the $3 million to $4 million range this year. We do expect to generate cash from working capital this year through inventory reductions and vendor approved extended payment terms. With the actions we are taking, the strength we are seeing from our e-commerce business, our cash position and revolver availability, the variable nature of the majority of our costs as well as our debt-free balance sheet we feel confident that we have sufficient liquidity and financial flexibility to weather this period even if showroom closures continue for an extended period of time. For all other details related to our results please refer to our earnings press release. With that we would now like to turn the call back to the operator who can open it up for questions. Operator?

Thank you. At this time we'll be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Brian Nagel with Oppenheimer. Please proceed with your questions.

Hi, good morning.

Hey, good morning Brian.

Congratulations on managing through a really difficult time quite well.

Thank you. It's been very interesting.

So my first question, I think each of you mentioned to some extent the recent sales trajectory and if I'm hearing the numbers correctly, it implies that the significant flex up in online sales is more than offsetting the impact of closed stores. So two parts there. One, if you just lay out maybe a little more detailed actual components there of how that's working particularly with the online and then in the channel that includes your partners like Costco as well? Then second how should we think about and I recognize you're not offering guidance at this point which is understandable, but how should we think about the sustainability of that? With the idea that, to some extent at least sales that are happening online now may have been influenced by a showroom that had been opened a few weeks ago. It is as we persist further to this period with no showrooms could that have an impact on online sales.

Thanks Brian. I'll handle that and then Shawn and Donna if you guys have additional comments, please add in. It was pretty exciting obviously to see that in the Easter week we comped over shifted Easter plus 7% with no showrooms open and that was a combination of things. One that was a significant increase in our activity from our showroom associates working from home doing chats and also doing the video Facebook demonstrations we spoke about. Out of the dollars they generated which was well over a million dollars in the past week roughly 80% of that was new quotes developed through online interactions and discussions. So what we're finding is that the associates working at home are actually becoming a very powerful tool for driving the online business. And then to put into perspective as we pivoted and obviously I'm giving you updated information because by the time we get to next week it will be outdated information but in the last three weeks the business has basically gone from 60% of the original budget that we had with all showrooms open to 70% to what we believe could be almost a 100% in the next couple of weeks. So we are seeing a dramatic shift in the way we're able to acquire customers. Obviously the other thing that's happened is there's been a dramatic change in the way we market. We've pulled back from the classic TV more into digital marketing and significantly more effort into social which is giving us real nice power. The other thing that's happening within the context of the marketplace is a CPC - costs are dramatically going down in the marketplace because of decreases in demand and advertising and we're finding that actually given our flexibility in our turn towards e-commerce we're actually able to take advantage of that and we're finding that our marketing ROIs are actually looking to be as good as they ever were with all of our showrooms open. So I'm really beginning to feel very confident that even in a worst case scenario where we don't have showrooms open for a long time that we can operate at a level that's at a growth over last year of total company and do it in a very-very efficient way.

That's really helpful. Then the second question I have this may be a simple, relatively simpler number question but as we think about just the cash flow dynamics of the business you said in your prepared comments that we basically mentioned towards cash neutrals which again is quite impressive. How should we think about just the inventory needs of the business? You came into the year relatively heavy on inventory. Shawn you commented a lot that there's very little [and I agree] [ph] very little risk of the inventory but how much can you [indiscernible] burn that inventory down as a source of cash to continue to run the business?

In general we have great relationships with our vendors and Shawn obviously has amazing relationships over 15 years long. So I think they had they give us an amazing ability to flex and have been very open with us in discussions about our need to flex as we build up to a recovery period and also flex in terms of payment terms and I'll leave Shawn and Donna to add additional details.

I would just add to that remark that we do view inventory as a key asset of the business just as we would view cash and our ability to maintain inventory level that will allow this business to flex as Jack said because clearly going into this closure of 91 showrooms didn't know exactly what to expect out of the business and so the last thing we wanted to do was put ourselves in an inventory shortfall and so we feel good about the inventory levels as they stand now. We do intend to manage it very tightly, very closely and we do intend to take advantage of the terms that we've come to expect from our overseas suppliers which then can allow us to, one, be in a position to exit this pullback as it were at some point with significant velocity we hope, and two, as you said it's actually a hedge as we see it against any further disruption as we're able to turn it and we proven that we've been able to turn that inventory into cash. And so specifically I don't know Donna what you would have to add to the cash side of that equation.

Yes. I would just add that our inventory purchases are only committed about 90 days out with our inventory vendors. To Shawn's point, although we give that long-range forecast our commitment is for 90 days out, our vendors are super flexible with us. We've had the ability to build some nice safety stock over the last couple of years which would give us anywhere between 12 to 16 weeks of, I will say added inventory. So we do have a lot of flexibility with inventory purchases being the largest cash spend that we have on an annual basis. If the need be we have a lot of flexibility on bringing those purchases back without risking the inventory levels to be there when we are able to ramp the business back up again and open up the showrooms. So I think we're in a really good inventory position as well as great vendor relationships.

Great, and one other thing to add which is then sort of late-breaking for us as you put into perspective and Shawn has mentioned this many times. Our inventory is basically evergreen. We have a core inventory business. So a huge benefit for us relative to some other companies is that we're not worrying about what happened to the spring inventory during this period. We know where it's going to go. It's going to go to fall inventory and the other thing that I think is very important to say is that as we've had this dramatic shift towards the e-com business the e-com business has basically covered the company's mix, the way the company was performing before. So one of the fears we had as we went into this would we see dramatic mix changes away from our key platform Sactionals and we have not seen it at all, in fact Sactionals have dramatically increased online obviously on e-commerce. So we're actually in a place where we're seeing mixes similar to what original planned and we have inventory that will last a long time. So we feel confident about that being an advantage as well.

Very, very helpful. I appreciate all the color and best of luck.

Thank you.

Our next question comes from the line of Thomas Forte with DA Davidson. Please proceed with your questions.

Great. I have one question and one follow-up and then I'll get back in the queue for additional questions. So my first question is how should we think about your flexibility on your showroom real estate? So when we come out of this, for example do you have opportunities to get out of leases, if you want to, change locations in the event that some malls and power centers might be better positioned coming out of this as far as who the other tenants of the mall are?

Yes, I think Tom, I will start with that and if you guys have anything to add on it. A couple things one is we're extraordinarily fortunate that all of our current showrooms are in a malls or better or great off mall locations and as you know with over $2,200 a square foot and productivity they're all extraordinarily productive. Now given that, we have always looked at the market penetration as a combination of customer acquisition cost and customer lifetime value and I think what this gives us a real view into the future of is that we really don't need to invest in showrooms that depend on foot traffic. I think we've just determined that we can drive our own traffic and we can look at very different asset light executions and I think what we believe now is we have significantly more freedom in terms of the way we'll think about developing a real estate strategy in the future which will probably mean not having to spend the kind of capital we have previously seen in terms of getting the touch points out there that we want to get out there but no mistake about it given the type of productivity we've seen from showrooms we'll continue to evaluate them as amplifiers of the brand but I think we're going to get a lot of learnings which are going to give us a much more agile real estate strategy in the next couple of years.

Great and then my follow-up question then I'll get back in the queue for more. You talked about your liquidity position. It sounds like you're in good shape to weather the storm. How should we think about your ability to take advantage of the [carry sac]?

So we have looked at every opportunity there that has presented itself. Right now, the 500 employees, I will call it cap limitation has with the current definition has restricted us from being able to apply for some of the larger dollars that are available to us that would be available to a company of our size. It doesn't mean that we're not trying every different angle with legislators and so on and so forth to see how we can qualify but we are anything related to the payroll tax deductions, we have all that stuff in motion but unfortunately the employee cap of the 500 has precluded us for from taking advantage of either the paycheck protection program or the disaster loan recovery through the SBA and then the final thing that came out in last week or so on the $2.3 trillion there's an adjusted EBITDA calculation there that right now doesn't fit the Lovesac profile. Again that doesn't mean that we're not working with the appropriate governmental sources and people that we are working with hunting outside to see if we can get some flexibility in that, especially since on the adjusted EBITDA sides. We're significantly, our adjusted EBITDA was really impacted by the tariffs and to say that tariffs which is something governmentally imposed is precluding us from some governmental dollars is something that we're working on but I can assure you that every notification, every dollar, every stimulus package that's coming out there we're on top of it and we're researching it, so to make sure that if there is something available to Lovesac that we get ourselves in the queue.

Thank you Donna. I'll get back in the question queue for my additional follow-ups. Thanks.

The next question is from the line of Maria Ripps with Canaccord. Please proceed with your questions.

Good morning. Thanks for taking my questions and I hope everyone has been well.

Good morning.

I think in the past you talked about expanding to 200 showrooms over time. Does the current pandemic change you're thinking about that long-term target, especially in light of the success that you've seen with a online channel and then secondly how does the current environment impact your plans around moving production out of China before the end of this year?

Okay. I'll take that first question and then I'll defer it to Shawn. So I believe, look I think that given the productivity we've had at showrooms I believe there's certainly an opportunity for 200 or even more touch feel points in the country. I think what we will really start to look at is what do they look like. We have these Macys tests. We have Best Buy tests going on. We have off mall small locations that are being incredibly productive and now we're able to show how we can drive our own traffic. So I think the real answer is we will have probably 200 to 400 touch feel points in United States in the next five years or so but they may look very different than the current profile right now because we have high interest, high touch feel product that people want to engage with and will allow them to do it but we'll do it in a way that's incredibly productive and we're certainly taking in the information in terms of that that the relationship between showrooms and the e-commerce and the showroom employees is really being redefined as we speak today. If you actually think about it right now we have showroom employees working from home and being productive. They're not showroom employees anymore. They're trade area employees. So this is something we're really thinking about as we think about trade area model becoming more and more robust. That's just not about showrooms it's about showrooms pop-up shops, other strategic relationships that are literally manned by trade area employees. So a lot of exciting thoughts we have and it'll take some time to develop that but we'll certainly be updating you on that. Shawn?

Yes. As it pertains to China manufacturing, I think an interesting thing happened over the last 90 days in that with the whipsaw that was, first a supply chain disruption potentially out of Asia with the COVID-19 outbreak and then became what became potential demand disruption. For a minute there China looked like a real asset to us and a strength because they exited their own bout with the pandemic and became a reliable source to us that had both the potential to manufacture Sactionals and covers -- selling sacs and covers, etc. And while we didn't know the future reliability of other countries that may yet experience their own outbreak. Our point being, our view towards supply chain is really about redundancy and about diversification and that's what we've achieved already to a large degree by moving to all of these numerous geographies that I listed in my remarks. And so I think, what I would say about getting out of China, we're more interested in having a diverse supply chain with plenty of redundancy and frankly we'd be happy to see China have a share of that, a small share of that. Obviously with the special tariffs still in place, we're interested in lower cost and we're achieving lower costs almost everywhere we go and so we will pursue those. On the other hand that puts great pressure on our existing vendors in China to lower their costs one way or another to us and offset the special tariffs with special discounts which we're also achieving. And so I believe that our goal has less to do with getting out of China and more to do with getting our gross margins back to that mid-50s range that's so important to us as we maintain our ability to garner revenues at high product margins and then also by the way refine our logistics model because that's a big component of our overall cost of goods sold. And get the whole system back up to that mid-50s range in gross margin and with reliability and diversification and by the way I've said it before a long-long term we're very interested in manufacturing more locally just from a sustainability standpoint and we have active projects and investments to that end and you'll see that unfold over the next few years.

Thank you. That's very helpful. I appreciate the color.

Our next question is from the line of Alex [indiscernible] Capital. Please proceed with your questions.

Hey congratulations guys. You make it sound much easier to be nimble than I'm sure it's been. So I have two questions and they're somewhat high level. One, you’re seeing, I mean we've all seen a rapid shift towards online purchasing broadly for obvious reasons and I'm trying to figure out from your perspective of what types of dislocations and cost changes you're seeing on in terms of shipping and logistics? And then the second question is more about with definitely sheltering increased gaming all this stuff should be a tailwind for your business, but how do you think about consumer reaction even outside of Lovesac to higher ticket items in the phase of recession we got another 5 million job losses this morning it looks like?

Wow. There's a lot in there that I probably would leave to [Larry Summers]. Yes, in terms of [Larry Summers] can probably answer the questions about the overall economy. We're certainly looking at our customers and we're very fortunate to have a customer base that's relatively speaking, enjoying probably more, a little bit more cushion from the recession than other folks and we're continuing to see significant interest in the product obviously and as we've gone into this we're seeing traffic go up. I think the headwind will be potentially what happens with the economy and who can predict that and to your point certainly we're seeing cocooning, gaming at home interest, shopping from home, going up dramatically as shown by our 400%, 400% plus increase in the e-com sales over the last week since the COVID-19 crisis began. So it's a lot of dynamics. We're being cautiously optimistic in all of our plans we are assuming we have headwinds for the next 12 months when we tell you that we think we can continue to operate this business on a cash flow neutral basis.

And anything on the logistics front?

Yes, I was just going to add on that Alex. As far as logistics, the cost is the same for us because as you remember we're not, we have showrooms, we don't have stores where people are walking out with inventory. So whether it's being purchased through the showroom POS or it's being purchased through the e-com POS, the shipping costs are the same.

Yes. In fact, as we start to expand and get the volume and scale we're seeing opportunities to continue to look into cost savings in that area. So we don't see that as a big issue. As we shift, it doesn't impact our business. In fact, I think I mentioned it in the script literally we had plus 7% year-over-year POS sales if you’d look at Easter shifts with only 60 basis point degradation. And in that case it was probably because we had some additional discounts we added towards first responders which was an incredible promotion that we didn't have last year but in the absence of that we feel pretty good about margin, our ability to maintain margins as well as transportation costs.

Great. Thanks a lot.

Thank you. Our next question is coming from the line of Thomas Forte with DA Davidson.

Great. Thanks. I had another question, another follow-up. So you talked a little about this on the last one, but on the health of your core consumer, I'm wondering about leverage you can pull, providing consumer credit, installment plans and maybe even initiating a subscription plan? So that's my first question then I have a follow-up after.

Yes. We certainly are, Tom we've been -- we've been definitely looking into different tests that extended financing. We've had extended financing as part of our programs in the last couple of weeks and we'll continue to evaluate those tests. We're also continue to look at new ways to target customers and new messaging as well, so those are all part of the package and we're doing a lot of testing and learning right now in terms of how customers are thinking about purchasing within the context of this environment.

Great and then for my last question. So I'm sitting on my Sactional and I've got my iPhone plugged into my power hub and I'm thinking about Best Buy and your new product pipeline. So without disclosing your new product pipeline, how should we think about why you chose Best Buy as it relates to your new product pipeline?

Well, I think you're on the right track. I mean I think our moves to -- look we at Lovesac we don't do a lot of things. There are a hundred home-decor companies that you could buy everything from Votives to candle holders to the candles themselves and fake flowers who knows. We only do a few things each year but the things that we do are innovative. They are on platform, on a platform. Currently we really think of ourselves as having two platforms Sactional and Sacs and building ecosystems around that as you just evidenced by having your phone plugged into the power hub. Power hub is our toe in the water in terms of technology and innovation on that front and we view it as very analog. If your phone is plugged in, we think that there are numerous ways that we can expand the Sactional platform and Sacs into technology in ways that's useful and not just gratuitous or clever but really truly innovative and we have numerous patents pending and [indiscernible] issued on different aspects like this and you're going to see some of these things roll out and clearly Best Buy is a chosen channel to work with for some of those reasons. And so, I will say this again we will continue to only do a few things but the things that we do will be impactful to the tune of we look at what happened last year as we’ve launched just the two innovations we did, while we admittedly have spent a little bit more money on marketing the brand and getting it out there consciously raising our CAC. We have our cost of acquisition. We have also dramatically raised our CLV. And we will continue to do that and eventually we believe -- eventually branch out into other platforms as well unrelated to Sactionals or Sacs but all that in due time.

Yes. And let me add, I'll add something a little more short-term or operational which is this, with the trigger, one of the biggest triggers for purchases of our products is a lifestyle change, a move, a redecoration of a house, etc. Strategically, Best Buy is looking to expand their portfolios. So they are capturing the largest amount of value in customers. Their customers are making big changes and moving and buying accessories and we are a perfect partner for them because we're completely incremental and within the context of forget even what Shawn's talking about may happen in the next six months or a year I can tell you this, the productivity we're seeing at Best Buy is more than double almost triple of even our own showrooms. So you can imagine that they're probably pleased with the kind of productivity they're getting out of our space just as we are with Macys. So while it doesn't seem obvious at some points when we're in these small footprints and we're interacting with customers at the right trigger points, it's an amazing synergy that takes place that's a win-win for the host as well as the pop-up shop.

Yes. By the way that that success that we're seeing on the pilot, obviously is just with the product platforms that we currently offer and with the product selection that we currently offer and in fact a truncated selection. So it may perhaps from the outside looking in it's unlikely alignment but we view a strategic and it's also working.

Great. Thank you Shawn. Thank you Jack. Thank You Donna. Stay well.

Thanks Tom.

Thank you.

Thank you.

Thank you. Our next question is from the line of Alex Fuhrman with Craig Hallum Capital. Please proceed with your questions.

Great. Thanks very much for taking my question and hope you're all doing well. I wanted to ask about the mix of business between your products line as your stores have shut down and the business is pretty rapidly shifted from stores to online. Are you still seeing similar trends that you saw in 2019 in terms of Sactionals versus Sacs versus accessories? Just curious what customers have been gravitating to as the business has shifted online recently?

Well, there is a lot of, even the last four weeks has probably like three different periods and right because this responses. So initially right after the COVID-19 situation started to have an impact we saw dramatic increase in the interest in Sacs and I think it's just Sacs are naturally always had a higher penetration on our e-com business and I think that sort of that whole cocooning and the gaming is going to continue to be a big supporter of the Sac business growing as well. However, with the pivot we talked about and the focus on our business, the focus of the associates in the last couple of weeks, so we have a short amount of data points but in the last couple weeks we've seen a mix online dramatically moved towards a mix very similar to what we had coming out of our showrooms and that's extraordinarily good news for us because that means our supply chain is also going to be in a really nice place as we go forward.

Great. That's really helpful. Thank you very much.

Thank you. At this time I will turn the floor back to management for closing remarks.

Yes. Thank you to all of our investors and analysts who follow the company and track our progress. We appreciate your support and we look forward to reporting on Q1 in just a few weeks. So speak to you then.

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