The Lovesac Company (LOVE) Q3 2021 Earnings Report, Transcript and Summary

Greetings and welcome to The Lovesac Third Quarter 2021 Earnings 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, Ms. Rachel Schacter of ICR. Thank you. You may 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 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 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 measure has been provided as supplemental financial information in our press release. Now, I would like to turn the call over to Shawn Nelson, Chief Executive Officer of The Lovesac Company.

Good morning, everyone and thank you for joining us today. I will begin my remarks by discussing the overall highlights of our third quarter performance. Then Jack will discuss the operational highlights of the quarter and progress being made on our key initiatives against what continues to be a dynamic backdrop. Donna will then review our financial results and a few other items related to our outlook. During the quarter, we continue to successfully navigate amidst the challenging backdrop, as demonstrated by our financial performance, as well as our progress on the operational front. Strong top line growth of 43.5% exceeded our expectations and is a testament to the exceptional job our team has done to meet customer demand, amid a pandemic impacted environment. I continue to be very proud and grateful for their efforts. We saw extremely high levels of profit flow-through on this sales increase given our swift moves to cut costs and overhead and tightly managed inventory during the pandemic. Of course, as sales have returned, sale also will cost, as Donna will discuss in more detail. Now let me speak to some highlights on our operations. We are pleased with our showroom performance despite the pandemic environment, as we operated insurance in a variety of formats, including walk-in, appointment-only and virtual. The strength of our showroom performance is reflected in Q3 25.5% comparable showroom sales increase. All seven of our shop-in-shops with Macy's and Best Buy were open during the quarter, which Jack will discuss in more detail. The big news release prior to quarter-end is that we launched a robust product offering on bestbuy.com just in time for the holiday. We're very excited about this expanded partnership, which will allow us to reach a broader audience and accelerate adoption of the Sactional platform. We continue to be excited by the alignment of the Best Buy customer demographic with our own, especially in terms of their intent to buy within the home category when shopping at Best Buy often during a relocation or remodel. As you're aware, there are widely recognized headwinds we are navigating in supply chain landscape, including a general shortage of ocean containers and equipment. But overall, we have been able to maintain excellent inventory positions and are currently delivering the majority of orders to consumers within a week to 10 days as expected. Moving to our financial highlights. We continue to see very strong demand for our products in Q3, resulting in $74.7 million in sales or a 43.5% sales increase, including 125% e-commerce growth. In addition, we had revenue contribution from two Costco temporary online pop-ups, which lasted about four weeks each ending in September and October that were not reflected in the expectations we shared with you on our Q2 call. We had a strong start to the quarter with positive momentum from our Labor Day campaign, which performed very well with media ROI above our expectations. From a profitability perspective, our results came in well ahead of our expectations due to higher margin product mix and more effective price promotions combined with some timing shifts and expense deferrals as Donna will discuss in just a moment. As a result, adjusted EBITDA was $6 million for the quarter. And we ended the quarter with a cash balance of $47.7 million, up over 70% from last year and a debt free balance sheet. While the environment remains uncertain, we continue to focus on improving our capabilities, our offering, our customer experience, and really our entire go-to-market position as we seek to expand our market share of the heavily fragmented industry. The attributes of our brand and product that resonated with consumers prepandemic, namely the convenience of researching and transacting online and receiving the product via FedEx directly to their door, we're only magnified during the pandemic has increased time at home led to increased spend on the home. But to swift pivot to entirely digital when showrooms are closed followed by a return to our omnichannel model, we have garnered tremendous learnings. We have very current market research that helps us understand the subtle differences between our millennial and post-millennial customers and how they are spending during the pandemic. We're tweaking our messaging and marketing tactics to fit these learnings. We've also proven out numerous digital first tactics from one-on-one Facetime product demos to mass viewership Facebook live events and many others as well. We estimate to have made over 2 million digital Sactional demos over the past six months. Nearly all of these new tactics we have teased out during this time we'll persist even after the shopping landscape returns back to normal. And we are very confident in our ability to maintain high growth even post-pandemic. Perhaps most importantly over the course of the pandemic, we have attracted many new customers to the Lovesac family. This growth in our customer file will yield benefits for years to come. And we will make sure we are using our sophisticated marketing approach to build engagement and drive attachment rates and lifetime value of these new customers. We also still have less than 2% unaided brand awareness, with significant market share opportunities. So, we'll build on these new customer gains as we lean into marketing, supported by this very, very strong ROI as Jack will discuss. Despite the pandemic, we remain focused on the long-term potential of the company and making progress on the strategic initiatives we have in place to drive long-term growth and market share gains. We continue to make investments in support of our expected growth while remaining agile and disciplined. These include; making the investments in infrastructure like our warehouse in California and our new East Coast warehouse opening in Q4; continuing to bring back expenses that had been temporarily halted or reduced, particularly on the marketing front to drive even more growth. Innovating on the product side, we continue to work and continue to target early next year for an exciting new product launch that will allow us to expand into a tangential category in the home, elevating the omnichannel customer experience. As previously discussed, we rolled out our new e-commerce platform in mid-August, and we are seeing a very positive response to the improved user experience and functionality with new features, such as appointment scheduling for showrooms, faster load time of configurator pages, save configuration functionality and additional customer experience improvement. We have experienced improved conversion driven both by mobile and desktop in addition to an increase in attachment rate. On the sustainability ESG front, we believe that Lovesac leads the DTC and furniture categories and its commitment to sustainability and ESG initiatives, building sustainable products and contributing to a reduction of furniture waste and landfills. This is an endeavor that has been core to our DNA since the inception of our company guided by our design for life philosophy, with substantial progress to date, including source all of our upholstery fabric from 100% recycled plastic and repurposing over 20 million plastic bottles in last year alone. Our products are built to last a lifetime and designed to evolve. And next year, we will be improving our communication on our tracking impact. Adherence to our high bar for innovation and sustainability will we believe fuel market share gains in the current and even new categories in which we will compete over time as we make operating decisions in support of our purpose, which is to inspire humankind to actually buy less, but buy better. As we enter the final quarter of the year, we feel good about our business fundamentals and positioning. We are pleased with our strong start in the fourth quarter, but are mindful about COVID uncertainty, especially with the high volume shopping days that lie ahead and the possibility of holiday shopping shifting earlier in the season. So, overall, we are pleased with our third quarter results, which exceeded our expectations from the top and bottom line. Against a pandemic impacted environment, we generated a positive adjusted EBITDA of $6 million, which is the first time we've achieved profitability in the third quarter. We have been very disciplined in operating the business by stringently controlling expenses, inventory and working capital, some of which we recognize is temporary as sales return so also will cost including marketing overhead and headcount. As we begin the fourth quarter, we believe we're very well-positioned to continue to drive demand as well as capitalize on the demand we have seen year-to-date for our unique products that are resonating with the consumer. And we look forward to building on our success to date as we close out the fiscal year. Before turning the call over to Jack, I just want to thank all of our associates for their hard work and dedication to our customers during the difficult times. And with that, I will turn the call over to Jack to provide you an operational update and discuss the progress being made on our key strategic priorities.

Thank you, Shawn and good morning, everyone. Our third quarter top line growth is a testament to our continued agility and ability to pivot the business to meet strong demand from new and existing customers, however and wherever they choose to shop at love Lovesac. Our Q3 new customer metrics were reflective of the success we are building awareness of our brand and attracting new customers. Total customer count was up 34% versus Q3 of last year and we had an almost 40% increase in Sactionals platform new customers. Both of which bode well for us going forward. Now, let me give you a quick update on our operations, both showrooms and with our channel partners. Currently 100% of our showrooms are in the walk-in phase due to increased health and sanitation protocols that I will discuss later. We also operate under the assumption that this can change rapidly due to market conditions. On the channel partner front, our Best Buy shop-in-shops are continuing to meet or exceed our expectations. And subsequent to the end of the quarter, we have expanded our relationship with Best Buy to include selling Sactionals on bestbuy.com. Showcasing our product through established and innovative online retailers like Best Buy expands our brand awareness serving as another touch point during this actual shopping journey and through this expanded partnership, we'll be able to reach a broader audience and accelerate adoption of the Sactionals platform. We believe the Best Buy brand and their customer profile is a great fit with Lovesac and look forward to a successful and growing relationship together. In addition, our four Macy's shop-in-shops are open and continue to be productive. In terms of our Costco pop-up shops, while we had no physical pop-up shops discussed last quarter, we did pivot to test and then rollout to temporary online pop-ups, which have lasted approximately four weeks ending in September and October and generating 7.7 million in total volume. They also have a third show running now through December 6th. Importantly, our partner channel business development overall grew and profitability to the improved structure of these partnerships, despite a sales decline of 8% due to the change in the Costco business. We are continuing to work on a long-term agreement on the Costco business, and we'll provide a more detailed update on the Best Buy and Macy's partnerships along with our Q4 results. Throughout Q3, we make good progress and important strides on our long-term strategic growth initiatives, which I will now discuss. Shawn already covered product innovation, so I'll get straight into discussing our key initiatives, starting with efficient and marketing and merchandising strategies. We continue to drive more efficiencies and high returns from our marketing spend. Our core media spend this year generated 50% more incremental sales than the prior year, with media ROI increasing significantly compared to last year, which is driven partially by an increase in showroom and touch point count. As we've said before, our showroom serve as great amplifiers for our brand and the return of our marketing spend. Each one we opened is worth approximately one point of increase in ROI. In addition, we have been focused on using more tactics that drive reach and further penetrate our target customer via non-linear buys like Hulu and over the top media, as well as targeting our linear buy to drive a higher reach. Through these tactics, we believe our reach grew from 65% to 80% in the third quarter of this year versus last year, which helped drive our media ROI. Moving forward, we will continue to lean in to non-linear media as part of our buys by rage as both have a role. New merchandising approaches enabled us to build higher margin sales that seen in our results. Our strong media and brand traction enables us to deploy less promotions as driving brand awareness tracks new customers to the business who are highly qualified and a result after conversion rate in both retail and online that are some of the highest levels we have historically seen. Additionally, our merchandising strategies have helped to drive higher AOVs through product mix towards premium and higher margin covers, as well as higher catchment rates for new products as Shawn mentioned. For example, a premium loves soft and down insert saw 10 percentage point increase in their mix year-over-year in Q3. Showroom operations, during the third quarter, we opened 10 showrooms in nine markets and ended the quarter with a total of 107 showroom locations. They also opened just last week, our last showroom of the year in Hoboken, New Jersey. So, year-to-date, we have opened it 18 showrooms with one relocated showroom and open in this fiscal year and classified as new, which brings our total showroom opening for the year to 19. Then this environment, we continue to learn a tremendous amount and refine our approach to operational excellence. We have implemented increased health and sanitation protocols with the [indiscernible] which is our what we call our COVID operating model to include Plexiglas at the key customer interaction points position showrooms to operate in a walk-in phase for all of Q4 pending market conditions. We've developed and implemented a showroom mission control role to assist customer at lifeline with on spot appointment scheduling that we rolled out in November. This system which leverages the calendar platform similar to a restaurant reservation system and allows showroom employees to book private and one-on-one appointments virtual or in person with customers. We are currently implementing updates that allow customers to book appointments on the road seamlessly from our lovesac.com website. Given the current environment, the feature that our customers have asked for and it's already been well-received and as we move into the peak holiday weeks, we expect it to further resonate with customers who want one-on-one service. will: In terms of showroom staffing, as previously mentioned all showroom managers and assistant managers shifted from traditional showroom environment, tier one into a virtual trade area environment tier two during the height of COVID-19, allowing them to sell virtually via podium webchat. Show managers also completed additional training to provide services such as customer love chat, email and phone, as well as return processing. We subsequently improve CSAT of our customer love department by nearly 20 points and a significant reduction in wait times for refunds demonstrating the impact of these improvements as we flex and adapt to this new environment. In terms of expanding other channel presence in sales, I've already discussed the current status of our Best Buy and Macy's partnerships. We'll continue to pursue opportunities with other partners, and we will provide you with updates when there's news of note. Finally, in terms of making discipline investments in our infrastructure, including technology and supply chain. First, e-commerce since launching our new e-commerce platform in mid August, we have experienced improved conversion driven by both mobile and desktop. In addition, we have seen an increase in attachment rates, which are now 40% versus prelaunch of about 34% of Sactionals purchases, included accessories. Accessories are now part of the purchase process, the customer builds their own setup. Continuous improvement and functionality has been added to the site since launch, including faster load time, the configurator pages appointment scheduling for showrooms, save configuration functionality and additional customer experience improvements. As mentioned earlier, our customer response to appointment scheduling has been very positive and about 40% of our business is now appointment driven, which is up from 0% pre COVID. On the supply chain side, we continue to focus on reducing costs, increasing efficiencies and medicating supply risks in our supply chain. Our regional DC in California is fully operating at 150,000 square feet. We are on track to open our East Coast warehouse at the end of this fiscal year. In addition, we are engaged in a multi-phase project to launch a supply chain management system, which will drive efficiencies in planning, production management and order fulfillment functions, positively impacting our ability to execute with excellence. In supporting our goal to diversify our supplier base, we now have three production sources in three countries for sectional inserts. In summary, we continue to be pleased with how our teams have adjusted to the environment in ways that will benefit in the long run. We continue to learn to effectively attract customers and our building the processes and infrastructure to deliver sustainable brand and creative and profitable growth. As we look to the all important holiday selling season, we're continuing to leverage our growing media spend as well as preparing our showroom operations for traffic throughout the holiday season by initiating our appointment system on the website, as well as and showrooms. We're very pleased with our progress in developing truly omnichannel brand where the channels are working together seamlessly to enhance the customer research and buying experience. With that, I'll turn the call over to Donna to review our Q3 financials and a few details related to our 2021 outlook.

Thank you, Jack. Good morning everyone. I will begin my remarks with a review of our third quarter results and then provide a framework for how we are approaching the remainder of fiscal 2021. The 43.5% increase in net sales to $74.7 million was driven by triple digit growth in our internet channel of the 125.2% and a strong rebound of our showroom channel of 27.9%. This was partially offset by a decrease in other sales of 8.7% driven by a decrease in our Costco in store pop-up shops, partially offset by shop-in-shops and the two temporary online pop-up on costco.com that Jack discussed. These temporary online pop-ups drove Q3 sales higher than expected as we had assumed no Costco net sales contribution when we shared expectations for Q3 sales growth. Total comparable sales, which includes internet channel net sales and comparable showroom point of sales transactions increased 53.5% in the quarter as a result of the 125.2% increase in internet channel net sale and the 25.5% increase in comparable showroom sales. Please refer to our earnings, press release for all other details on our comparable sales performance. By product category our Sactional sales increased 46.8%. Our SAC sales increased 30.6% and our other category sales, which includes decorative pillows, blankets, and other accessories increased 6.2%. The 487 basis point increase in gross margin versus the prior year period reflect the 535 basis point improvement in gross profit as the result of less promotional discounting, favorable product mix shift, and lower product costs related to vendor negotiated tariff mitigation initiatives. These were partially offset by an increase of approximately 48 basis points in distribution and tariff related expenses. We exceeded the third quarter gross margin expectations we shared with you on our last call with the upside, primarily driven by less promotional discounting and more favorable product mix than we had anticipated. And in addition, we realized benefits from vendor rebates in the third quarter that we had previously expected to come in Q4 and the expected step up in freight and warehousing costs was lighter than plan due shifting time of projected inventory receipt. The modesty 6% year-over-year increase in SG&A dollars reflects the impact of our COVID related financial resilience measures. The year-over-year increase was driven largely by increases in employment costs, increased rent associated with our 107 showrooms, an increase in equity compensation relating to the modification of stock options and credit card fees related to the increase in internet and showroom sales. These increases were partially offset by a decrease in in-store pop-up shop fees related to the decrease in in-tore pop-up shop sales and decreased overhead expenses as a result of COVID-19 related travel restrictions. SG&A as a percentage of net sales decreased approximately 1,228 basis points resulting from the leverage of employment costs, selling related expenses, such as credit card fees and pop-up shop fees, rent, equity compensation and expenses related to COVID-19 restrictions such as travel. SG&A expense was approximately $5.1 million lower than our expectations, principally related to the continuation of our financial resilience measures that resulted in a deferral of professional fees and payroll related to delayed hiring. Our investments in advertising and marketing, which benefit extended period increased by $3.7 million or 75 basis points to 14.7% of net sales in Q3 due to increase media and direct to consumer program spend, which contributed to the third quarter sales increase. This increase was approximately $1.9 million lower than planned due to a shift into the fourth quarter to the support the promotional activity, as well as customer initiatives we have planned for the fourth quarter. Depreciation and amortization increased $176,000 from the prior year period to $1.9 million, principally related to capital investments for new and remodeled showrooms. In the third quarter of fiscal 2021 operating income was $2.5 million, compared to an operating loss of 6.9 million in the third quarter of last year, driven by the sales and gross margin increased as well as SG&A leverage, I just discussed. And we're net interest expense for the third quarter was approximately $47,000, principally relating to the unused line fees on our revolving line of credit. Tax expense in the third quarter of fiscal 2021 and 2020 was not material and relates to minimum state income tax liability. Before we turn our attention to net income, net income per share and adjusted EBITDA, please refer to the terminology and reconciliation between each of our adjusted metrics in their most directly comparable GAAP measurements in our earnings release issued earlier today. Net income was $2.5 million or $0.16 in diluted earnings per share in the third quarter of fiscal 2021, compared to a net loss of $6.7 million or $0.46 diluted earnings per share, in the third quarter of fiscal 2020. We generated positive adjusted EBITDA of $6 million, as compared to an adjusted EBITDA loss of $3.7 million. In the third quarter of last year, turning to our balance sheet, our liquidity remains strong as we ended the third quarter with $47.7 million in cash and cash equivalents and $19.2 million in availability on a revolving line of credit with no outstanding debt on the revolver. In terms of outlook, given the continued uncertainty around COVID-19 related disruption, we are not providing formal net sales guidance. We are pleased with the start to fiscal Q4, but it's unclear how much of this represents an early start to the holiday season. In addition, COVID cases continue to increase creating uncertainty. And we have very large volume holiday shopping days. That's still lie ahead. Finally, we have three temporary online pop-ups with Costco planned for the fourth quarter versus the two executed in the third quarter. As a result, while we currently feel confident in our ability to generate healthy year-over year-net sales growth, we do not expect it to be at the level where we reported in Q3. From a profitability perspective, we still expect expansion in adjusted EBITDA margin rate as gross margin leverage, offsets planned operating expense deleverage. The tailwinds of less discounts and the benefit of cycling tariffs, combined or expected to more than offset freight and supply chain cost pressures on the gross margin front, while shifts in spend will result in operating expense deleverage. Therefore, for the fourth quarter, we expect a strong 50% to 60% year-over-year increase in adjusted EBITDA from the $8 million level reported in Q4 last year. We continue to expect to generate cash from working capital this fiscal year and our expectations still reflect the CapEx will be in the $12 to $14 million range. So, in conclusion, we had a very strong Q3 from both a net sales and profitability perspective. And we look forward to closing out what has been an unprecedented fiscal year, having made significant strides across all areas of the business. We will build on this progress in fiscal 2022 and beyond, as we positioned Lovesac for long-term growth, generating value for all of our stakeholders. With that, we would now like to turn the call back to the operator, who can open it up for questions. Operator?

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Thomas Forte with D.A. Davidson. Please proceed with your question.

Great. Thank you. So Shawn, Jack and Donna, please stay well. I have one question and one follow-up. So Shawn, at a high level, I wanted you to opine on, to what extent COVID-19 has had a positive impact on the lifetime value of your customer and your customer acquisition costs. And to what extent that benefit a short-term in nature and long-term in nature. And then I have a follow-up question.

Yeah. I'll give a quick comment and then allow Jack to fill in any blanks. I, -- it's a dynamic environment, right? To say the least and I think that, in many cases, particularly in the home category, obviously Lovesac and like companies have been recognized as perhaps COVID 19 beneficiaries with people working from home and spending money on their home. So, while I believe that, much of our success of late has been due to the agility of the team and our ability to react to the environment. We certainly recognize these tailwinds. And in our case, rather than seeing just increased sales, as many in the category seen in depleted inventories and longer lead times there's so many things I've tried to purchase myself as a consumer that you just can't get right now, or you have to wait much longer than expected. That's not been the case for us, because of the way we've managed it. And so, the results have come out for us more toward the bottom-line, I believe in the near-term. And, essentially I think we've gotten more for less just, obviously, smaller staffs on our front lines, having reduced at the very beginning, buckling down for COVID and also the way that we're spending on marketing our ROIs are certainly high and increasing, partly due to the new tactics, but obviously aided by these sort of tailwinds. And so, long-term for us, our outlook, we would still like to maintain high growth, not just through new product innovation, which will come but also, due to these the ongoing, test and learn, behavior that we've demonstrated for a long time and our commitment to innovation on the marketing front. And, and larger spends is as we get bigger, perhaps, expecting the tailwinds to trail off. And so on the top line, we believe we can sustain high growth. Obviously the numbers get bigger and harder, but that's still our outlook on the bottom-line the company is leveraging and reaching that critical mass where I think, we're able to show leverage, at the same time, we would expect some of that tailwind to trail off eventually and but time is on our side on that -- from that standpoint. So -- and so I don't think that, we're at all ignorant to the kinds of we'll call it COVID tailwinds that are driving some -- some of our success at this moment, but, we haven't let it be a runaway train and just drive self to the roof and deplete our inventories. We've been very careful to manage that. I don't know Jack, if you have anything to add to that.

I think you covered a lot from them, the sort of managing it situation. The only thing my observation is Tom, from a market dynamics. If you're just looking at it from a consumer dynamics, I think obviously with massive disruption, we are advantage to take advantage of that when you have a brick-and-mortar disruption. So I think, during the disruption of brick-and-mortar, we clearly became a preferred choice among people who didn't have as many choices as they did before. And that's a tailwind that obviously won't last forever and obviously comes with its own costs. So, I think well then when you look at just the long run, that tailwind will go away obviously we all want it to. I think in the long run though, that tailwind indicates, an advantage for us as you look at some of the larger, I think, trends that are happening, I think the headquarters moving out of the metro areas, less headquarters being a focus I mean people are moving out of metro areas. And I think focusing on homes, educating from home is becoming a new trend as well, as well as working from home. And I think home buying obviously for the next couple of years is probably going to be at an elevated level. Those from a really long-term consumer trend make us feel very good. And the way that people are beginning to purchase, and the way our product is designed and our services design makes us feel really good, really good about the long-term, the short-term very unpredictable.

The last thing I'll add, sorry, is I think that often Lovesac is -- Lovesac's greatest opportunity and perhaps strengths in the marketplace is our unique product. And what I mean by that is we're not just a merchandiser capitalizing on a macro tailwind. We have a product that still most people in the furniture shopping category don't know about and is in our humble opinion superior to its competitive products in many, many ways. And so the adoption of our platform, which is a sticky platform, which drives repeat, which obviously has a very high customer satisfaction ratings is something that will grow. We believe on itself as, more people adopt the platform and reviews go up and word of mouth increases so will those -- so will the platform grow? And so this is kind of tailwind for us is fantastic from that standpoint, in helping to push us further down that path and increase the speed and weight of that flywheel. And so, I think, that's one unique aspect of this company is different than just a merchandise or capitalizing on a tailwind.

Excellent, Shawn. Excellent Jack. So as my follow-up then, I've been very impressed with the way you've pivoted the use of your physical showrooms, by appointment shopping to drive digital engagement. But collectively, would you say that, assuming that things return to semi-normal in the second half of calendar next year, and you're able to return them all to, physical open as they were in the past. Is there a way to gauge the level of productivity, at your showrooms and the potential for improvement? If you're able to reopen them to the extent they were pre-pandemic?

Yeah. That's -- there are a lot of interesting things, we're looking at. I would just say this I think that, while we know there were some really interesting performances and shifts between performances between the web and the showrooms, as there were openings and closings. I would say the one thing we've learned is there's an immense amount of synergy between web and showrooms. And what's really takes -- taken place I think the biggest observation I would say is that versus a bifurcated shopping experience. Now it's becoming an integrated where research is taking more place online. And in the showroom it's a closing opportunity. And what that means for us is I think a couple of things, I think it means huge opportunities for continued looking at, how touch points operate relative to the two web and touch points are obviously include a number of options. They include shop-in-shops, they include, potential concierge services. They include things like our showrooms. They include kiosks. And they include other relationships. So what we're learning really right now is the go-to-market strategy has a lot more options than it would have a year ago. And see them making us feel really good about the productivity we'll get out of our touch points in the future.

Great. Thank you, Jack.

Thank you. Our next question comes from the line of Camilo Lyon with BTIG. Please proceed with your question.

Thank you. Good morning, everyone. Really remarkable quarter here, so congrats on that. Actually I think this is the first Q3 since the public that you reached profitability. So I want to touch on that first, specifically on the gross margin front, if you can highlight, maybe Donna, if you could just touch on where are we in the tariff wind down efforts? And how we should think about some of the incremental costs that we should expect to see from the temporary costs from the distribution center, opening here in the fourth quarter and really trying to understand if there's been a pull forward of the overall gross margin expansion relative to the timeframe that had been laid out before, so any color on the progress that would be very helpful?

Yeah. Good morning. So, yes, couple of things. So, probably the biggest impact on our gross margin expansion is the discounting -- the promotional discounting, the reduction in promotional discounting with some product mix shifts into some higher margin items. We are -- when you ask the question about how far are we through tariffs? From a dollar standpoint, we still have about 42% of our inventory purchases, predominantly on the cover side coming out of China. So, we are still being impacted, although less and less as we continue to go through the year. So, you are seeing some year-over-year increase in gross margin because of the tariff shift. But more of it's coming out of the promotional discounting and some -- then their pricing negotiations to help us mitigate the tariffs that are still coming out relative to the products coming in from China. Hope that answers?

Yeah.

So, we still have tariff -- and we still will see tariff cycles through our -- impacting our gross margin, but we believe at a lesser and lesser level as the years go on. But we still do have some inventory coming in from China that is impacted by tariffs. And as far as the Northeast warehouse, it's supposed to be fully operational by the end of the fourth quarter, which means staff inventory going in and, and so on and so forth the start-up costs are a lot less than we originally had anticipated, which is great. So we don't anticipate a significant impact on our gross margin for the remainder of this year even going into Q1 of next year relative to the start-up costs relative to the Northeast warehouse.

That's great to hear. Thank you for that color. Jack and Shawn, if I could just ask a question on how you think about coming back to the dramatic increase that you've had in your customers. I think Jack said there's a -- there was a 34% increase in your customer file versus last year.

Right.

I'm curious to know how you'd leverage that data to extend that lifetime value. So taking what you've seen this year from any sort of COVID related tailwind and making those really sticky into next year and beyond, what's the strategy and thinking around taking that rapid increase in customers that you've achieved?

Yeah. I think that's the beauty and I think that's the excitement we have when we talk about the platform approach to marketing. So once people buy into the Sactional platform, we continue to innovate and work on new products within that platform. And we talk a little bit about the tip of the iceberg things; like attachment rates going up from 30% to 40%, adding the storage seat, adding the electrical charging components. Those things are starting to really, obviously help us. And obviously there's a strong message in terms about the lifetime value of the product and flexibility and buying covers that also add. So in general, what we're seeing right now is while we've had accelerating new customer rates, we've seen attachment rates and repeat rates in terms of purchases maintain and be very strong. And I would expect with some of the innovations that we have coming in the next year or so, that will only strengthen. So we're very excited about the opportunity to leverage the platform and the innovation on our current customers. And we are seeing excellent trends right now. Shawn, I don't know if you want to add anything to that?

Yeah. I mean, again for us, each customer is special. We are unique design for livee proposition would have them being customers for live. And we're very interested in those relationships. We're very interested in delivering to them new ways to delight them and allow them to reverse compatibly, add to their Sactionals. And also eventually get into other categories in a design to live way. And so, there’s nothing but good news. We take our customer list very seriously and view it as a major strategic strength of Lovesac.

Yeah. I mean, that's the real business approach to it is, we think there's more value in mining, deep into the platform and adding innovation than there is and adding add-on categories is terms of accessories. So typically that will be their approach. Go deep into the platform, design things that are key to the platform. So you're staying in your core business and getting stronger in it.

Just to follow-up on that. I think it's fascinating that you've had this tremendous increase. Have you seen a deepening of your core consumer demographic or has it been the broadening of the demographic that's coming to the brand?

It's been pretty dynamic this year. I would say, we'll probably be in a better position after the fourth quarter to talk more details. We have seen changes in the demographics along with the disruption. We've certainly seen a younger group come in. I think, especially with the online surge, we saw that that is a different -- a slightly different demographic than the core, core. But typically what we're seeing across the board is, is strengthened the business across all of the demographics really.

Got it. All the best guys. Thanks.

Thank you.

Thank you. Our next question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your question.

Good morning. Thanks for taking my questions.

Good morning.

Good morning. First off, congratulations on a great quarter. So the first question I have, I think it's a bit of a follow-up to the prior question, but just with regard to promotional activity and the positive benefits we saw to gross margin here in Q3. And the question I have is, as you look at the reduced promotional activity, do you think that is a function of COVID in an extraordinarily strong underline demand environment? Or is it starting to show that maybe there's greater overall awareness about the Lovesac in the products that could suggest maybe promotional activity could be more subdued going forward?

Boy, that's a hard one. So many different things are happening right now. I think we're certainly happy to have benefited right now from the stickiness of the brand and the situation and allowed us to reduce our promotions at a critical time obviously in the company and to really turn and pivot into profitability is a significant -- when I think. In terms of long-term, I think we're going to continue to look at the opportunity in terms of what are the things we do with our pricing and promotions to allow the strongest long-term growth of a sticky brand. So I think there's a lot -- we need to understand and analyze about our customers and the value proposition before we think we have a real insight into the sort of long-term effectiveness, but certainly in the short run, it helps us. It makes our decisions a lot easier in terms of, of how to think about, are we going to redeploy, profitability into more marketing? Are we going to give it back to the customer? Are we going to do a number of things? We're in a really good situation that we can understand consumer trends I think right, make the right decision in order to grow as a super sticky, customer love brand.

And I think it's important to -- I think the most important takeaway for now is that while we're pleased to have been a beneficiary of some of these COVID tailwinds as opposed to the opposite and we are simultaneously achieving more penetration of our brand, more acceptance and again building that customer base that will support us going forward. And also just credibility in the marketplace is drives more sales because Sactionals and new products like these are the kinds of things people are skeptical about until their neighbors have them or they get those kinds of reviews, all of those things bode well for us right now. But that said, what you're seeing is play-through is not just in topline growth for us in fact, less so than some in the home category. But again, in profitability -- in margin, because we're able to get a little bit more for a little bit less and promote less and those sorts of things in this environment. And so I think that we are still, pretty cautiously optimistic about continued gross margin recovery about the go-forward quarter. There's not to say that we're. pessimistic, but we don't want to get over our skis. We don't want the outlook for this company to get ahead of itself because we recognize those benefits in the near term coming through on that gross margin line, maybe a little bit prematurely coming through in our net margin maybe a little bit prematurely and it's good cause we'll build on it, but it -- it's been increased, I think.

Yeah. And I think in the short run, as Donna mentioned, if you -- the piece is putting together, I think the increased margins and the ability to market with less discounts bodes well for investing then additionally and our ability to scale and become a company that's really strong in the next five years, which is where all of our focuses right now.

Got it. That’s very helpful. And then the follow-up question I have -- look we're hearing from you today and then a lot of companies, just this and I think it's very, very smart, you’ve kind of caution towards the holiday, given the potential pull forward demand or shifting demand dynamics through this COVID-19 holiday? So could the question, I always, you look at your data, is there anything that you're seeing that would sales here so far in Q4 that would suggest that actually has been a pull forward in demand or was it just more overall caution towards the season?

I'll take that and let either Shawn or Donna finish it off. I think right now we see – we certainly, I think, no -- we do understand, I know the shopping patterns have stretched out the holiday season and pulled it forward a little bit. With that said, we are certainly very happy with where we are. We're comfortable with trends and I think we feel good about the business right now as we go through the first -- the fourth quarter.

Yeah. I don't think we -- throwing the data can see anything that would confirm or not confirm that things had been pulled forward. We are again pretty pleased with the results so far and remain cautiously optimistic. For us fourth quarter is a big deal. And we're -- we were very pleased obviously to see profitability in that third quarter, which is the first time we've seen that happen. And we'd like these trends to continue and believe they can.

Thank you. Again congratulations.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Matt Koranda with ROTH Capital Partners. Please proceed with your question.

Hey, guys. Thanks for taking the question. Just want to start off on the guidance and the 50% to 60% increase in EBITDA year over year. Any help on sort of the revenue growth that we're assuming to get to that level? Maybe you could just talk about --revenue quarter to date, what percent of your plan is gross to-date maybe and what are you counting on for the rest of the quarter?

Yeah. We're not -- Matt, we're not specifically giving guidance other than we do expect the increased quarter over quarter in fourth quarter and not to be as much as you saw our Q3 this year over last year. That's pretty much all guidance that we're giving along with the fact that we are indicating that we're getting -- we do have three Costco online pop-ups booked for this quarter. So we are anticipating some net sales and contribution coming in from Costco as well. As far as the fourth quarter, again, our fourth quarter started off strong, but we remain cautiously optimistic as both Jack and Shawn have said. But as far as getting specific guidance as to what are our net revenues or net sales are going be other than its not increasing as much year over year as third quarter that's the limited amount. And a lot has we have, it's been what are we at December 9th? So, we probably have a couple more weeks with the stronger shopping, weeks happening. So at this point, a fair amount probably more than 50% of our revenue is probably from our projections are in for the quarter.

Okay. That's helpful. And then, just on the Costco roadshow front, can you just confirm there was no physical roadshow revenue in the third quarter? And then maybe just talk a little bit about the online roadshows and sort of your progress there. It sounded like they were pretty productive, but maybe just a little more color on that?

Yeah. Yeah. There were actually no road -- no physical roadshows in the third quarter. I think there was some confusion because I think there were some online advertisements from Costco after they had been canceled that made people think we had those. So, we did have the digital roadshows. They did very well, very pleased with them. We hadn't done it before and with little -- very little support we're successful to the tune of, I think, the $7 million plus we discussed. We do plan on having roadshows in the fourth quarter as well. We will be testing three roadshows and we're excited about it. In terms of long-term go, everything is tied to the overall discussion. So, we're still working with them I think from last report from our last discussion in Q2, we were very sort of cautiously negative. I would say we're now cautiously optimistic that we'll get to a good place for next year. And we'll inform you of any details as soon as we can wrap things up with them.

That's great. And then just, if I could sneak one more on the gross margin front. Donna, could you just quantify the vendor rebate benefit in the quarter? And I assume that doesn't repeat in the fourth quarter, but just clarify that for us.

Yeah. So, it was -- I mean, in dollars, it was probably about 950,000. We do have a small amount still projected to come in Q4, but not to the magnitude of Q3 and that's comparative to probably about a million, two that was in Q3 of last year and then to rebates with no vendor rebates coming in the fourth quarter of last year.

Okay. Very helpful. Great job guys. So, I'll jump back with you. Thank you.

Thank you.

Thank you. Our next question comes from the line of Maria Ripps with Canaccord Genuity. Please proceed with your question.

Good morning and thanks for the questions. It sounds like you have a fairly successful shop-in-shop strategy. Can you maybe talk about how you approach of working with channel partners evolved over the past several months and what that might mean for growth and margin prospects?

Yeah. That's an interest question. And I would say we're very pleased with -- as you do some of the background, if a backup a little bit and we talk about some of the Costco history, at the time the profitability of Costco was not at the levels that we were seeing with some of these shop-in- shop opportunities. And I think it really made us aware of that we can operate with partners in a branded creative way and a very profitable way, that's win-win. I mean, what we offer is obviously a really unique product with a lot of stickiness and an ability to drive sales. And I think in a very productive way -- more productive than basically anybody else can do and obviously by partnering with the right partner, we massively change our CapEx expense and an investment in an obviously a reduced way while maintaining touchpoint presence. And what I would say is, we're continuing to look at the touchpoint opportunities. And I think that the considerations are the ability to reach people, the amount of capital we have to spend and our ability to drive traffic or our partner's ability to drive traffic relative to historical models. And so, if you think about a shop-in-shop with Costco, you have synergies between brand and ability to drive traffic, that are pretty high relative to the CapEx costs when you would compare it to -- for perhaps a classical showroom and a mall environment. So, those are the opportunities we're looking at. I think what you'll see is continued growth in showrooms. We're committed to showrooms. But continue to increase in the mix of non-traditional showrooms in our touchpoint strategy, and a lot more to come as we develop the specifics. We’re in a test and learn mode for the next six months in terms of touchpoints. So we'll be giving you updates as we make decisions.

Thank you. Our final question this morning comes from the line of Alex Fuhrman with Craig-Hallum Group. Please proceed with your question.

Great. Thanks very much for taking my question and I'll have my congratulations on the profitable third quarter. Why does ask about the showrooms? Jack, it sounds like you just kind of touched about it there at the end of the last question there, but you open 10 showrooms in the third quarter. I think that, if I can remember correctly, the most you've opened in any one quarter, was that just maybe a little bit of pent-up demand from showrooms that you weren't able to open earlier in the pandemic? Or are you seeing some really good real estate opportunities out there? Just anything you can share with us about the performance of your new stores and what opportunities we're seeing on the real estate front will be helpful.

Yeah. Look, our showrooms, the 10 -- and I will attest to this as our team did an amazing job, but there was no intention originally to open all 10 in the third quarter. It's really based on the COVID impact and the impact of working with businesses and construction and approvals and everything else. So, that was really -- deals had already been committed to that were squeezed into the back end of the year. Now, as we go forward, clearly, with any kind of disruption like this, it creates opportunities. So we see dramatic changes and opportunities in terms of real estate deal making and values as well as options in terms of as we increase our ability to drive our own traffic. We inherently create significantly more options in terms of creating touchpoints that are less capital intensive and perhaps have less expensive lease rights that we have. So, I think, what you'll see is a more diversity as we go forward with our touchpoint strategy.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Nelson for any final comments.

So thank you much to all of our investors who support us [technical difficulty]. We're grateful particularly [technical difficulty] for your continued support. Thanks so much.

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