Greetings. Welcome to The Lovesac's First Quarter Fiscal 2022 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 not that this conference is being recorded. I will now turn the call 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 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.

Thank you, Rachel. Good morning, everyone, and thank you for joining us today. It was just eight weeks ago that we were on our year end call where I discussed our fiscal 2021 accomplishments, out CTC operating philosophy and Lovesac's go forward strategy in a fair amount of detail. So I will keep my remarks brief today by reviewing the highlights of our first quarter financials and operational performance before Jack outlined our first quarter progress on our key growth initiatives. Donna will wrap up our prepared remarks with a review of our financial results and a few other items relating to our outlook. We are overall very pleased with our first quarter results as we continue to build on our momentum from last year. As a reminder, we anniversaried the onset of the pandemic and subsequent showroom closures late in Q1. Even on a two-year basis, business performance was very strong relative to the first quarter of fiscal 2021 with two-year combined comps at 98.9%. Now let me review the highlights of our first quarter performance. For the quarter, total net sales were $82.9 million, up 52.5% versus the prior year period. We delivered total comparable sales growth of 48.8% and continue to be very encouraged by the broad-based strength and demand for our products across both, new and existing customers. We saw strong growth across showroom and other partially offset by a decrease in Internet sales reflecting the channel shift back to our showrooms that are now fully opened. Adjusted EBITDA increased 193.7% to $5.3 million and marked the first time we've achieved profitability in Q1. This strong start to the year is reflective of continued strength in the demand environment combined with our focus on improving our offering, customer experience, and go-to-market position as we seek to…

Thank you, Shawn, and good morning everyone. We are very pleased with our first quarter performance and the strong progress our team continues to make on our key strategic priorities which I will now review. First, efficient marketing and merchandising strategies. We are leveraging our learnings from the second half of fiscal 21 and are continuing to drive more efficiencies and high returns from our marketing spend. Factors [ph] contributing to these increases include extension of media flights [ph] to run through key events, driving reach and our target customer through ramping up nonlinear buys, like Hulu and OTT. We are also targeting a linear buy to drive higher reach. We're also increasing our digital spends as we know customers spend more time digitally researching their home furnishing purchases. The increases include both spending more on existing platforms, but also introducing new channels such as TikTok which we have seen success in. Second, showroom operations. We opened eight showrooms in Q1 and remain on track to open approximately 25 this year. Our showrooms continue to be an important component of our omnichannel model and importantly added capabilities like mobile concierge, appointments, on the spot scheduling, and showroom post-purchase specialists are further enhancing The Lovesac shopping experience. To that end, in the first quarter, approximately 25% of our showroom business was generated from appointments driving strong productivity. We also plan to test the new consumer touchpoint in the second half by incorporating up to 10 branded kiosks in our real estate strategy. These locations will be initially focused on trade areas where our core consumers live, but our brand is not yet represented by physical touchpoints. We believe that they will also serve as additional touchpoints in trade areas where we have an opportunity to gain incremental business in an asset…

Thank you, Jack. Good morning everyone. I will begin my remarks with a review of our first quarter results and then an update on the framework I shared with you last quarter as it relates to how we are approaching fiscal 2022. Net sales increased $28.5 million or 52.5% to $82.9 million in the first quarter of fiscal 2022 as compared to $54.4 million in the prior year period driven by our showroom sales and other channel sales. The increase in these channels was partially offset by a decrease in our Internet sales against the period of elevated digital sales last year given the pandemic related showroom closures. Showrooms net sales increased $30.9 million or 170.4% to $49 million in the first quarter of fiscal 2022 as compared to $18.1 million in the prior year. This increase was due principally to a $26.7 million increase in comparable showrooms sales to $41.3 million in the first quarter of fiscal 2022 as compared to $14.6 million in the prior year period due to the temporary closures of all of our showroom locations. As a reminder, point-of-sales transactions represents orders placed through our showrooms which does not always reflect the point at which control transfers to the customer when control transfers net sales are recorded. Other sales which include pop-up-shops and shop-in-shops sales increased $2.6 million or 41.4% to $8.8 million in the first quarter of fiscal 2022 as compared to $6.2 million in the prior year period with the increase related to the closures of all pop-up-shops and shop-in-shops locations due to COVID-19 in the prior year period. Internet sales, sales made directly to customers through our ecommerce channel decreased $4.9 million or 16.3% to $25.2 million in the first quarter of fiscal 2022 as compared to $30.1 million in the prior…

Thank you. [Operator Instructions] And our first question comes from the line of Camilo Lyon with BTIG. Please proceed with your questions.

Thank you. Good morning and a great start to the year, congratulations [Audio Gap] momentum. Donna, I just wanted to ask firstly on the guidance that you just provided. So you talked about mid-single digit EBITDA range if you achieve mid-thirties sales growth. You talked about gross margin pressures ensuing from freight, yet you just put up a quarter where you had about 500 basis points, little over 500 basis points of margin expansion. Can you just articulate what you see coming down the pipe that would suggest that there is incremental amount of gross margin pressure aside from the freight expense that you've been experiencing already that would substantially decelerate the margin profile into the back half of the year? Is it promotions? Is it something else that we're not contemplating? And then I've a follow-up please.

Yes, good morning. So yes, so I think we're similar to a lot of other people out there that the freight headwinds just keep compounding. So where we had originally projected our inbound freight rates and it's specifically on the inbound side as port congestion, container availability, it's making it more and more difficult, although inventory is a really good position for us, it's just costing us a lot more to bring it in and get ahead of some of the other people that need to get inventory in. So that's – it's principally that, it's not related to discounting at all. We have very strong discounting or reduction in discounting. We're still planning to do that, but it's a 100% related to the headwinds on the inbound freight. I will tell you that we're going to -- it will impact more in Q4. It will be most meaningful in Q4 than in Q3 when you're doing your modeling, but I think the real positive takeaway is that even with those headwinds, we do have more levers to pull to make sure that we can still generate adjusted EBITDA dollars in the mid-single digit range. So the teams are working really, really hard to mitigate from top line all the way through to SG&A.

Yes, thank you for that. This is Jack. Just to add to that, I think what you saw in the quarter and the last couple of quarters are really leveraging systemically from the way the company is growing, and we expected to get those. And we're seeing a lot of strength as well on the brand and stickiness which we believe will continue to enable us to sell at decreased discounts. However, and the team has been really great at bringing in inventory in order to mitigate the potential freight costs we'll be saying later in the second half. So, really what we're seeing is, a lack of impact in the first half of some of these headwinds people have been talking about and starting to get those headwinds in the second half. But the first half growth and margin is really related to just the scaling of the business and strengthening of the brand. So, there's definitely two different trends going there, one is long term and I think the other one we would all agree is a transitory situation in terms of freight headwinds.

Camilo, one other thing I will throw in that too, if you recall from our fourth quarter earnings call, even third and fourth quarter, we had some substantial things that also impacted gross margin, vendor discounting. We were able to bring down our inventory reserves. So, what we've done is, we've started working with our vendors to not necessarily give it to us in rebate. So the impact on the first quarter of those one time rebates are going to be less impactful and we're actually getting it in pricing. So, that reduction in pricing is helping us throughout the year versus the one time. So, there's that that we get -- you know we still have one vendor that we work with that gives us rebate. So, it just won't be as impactful. The rebate number as it was in the prior years, again we're seeing it in the discounting on the product and also we do not anticipate any, we call benefits from reduction in inventory reserves. So that's something else as well.

Got it, great color. And then just my second question is, really reflective of what you're seeing from the consumer perspective? If I heard some of the prepared remarks correctly, it sounded like you have consumers coming to you demanding more products, more innovation from you. So the question is, is that true? Are you getting a pull sort of requests from the consumers now that they’ve, now that this has been the step function change and awareness of the brand? And how does that coincide with the expected next innovation launch? And what’s the update on the timing of that? Thank you.

I’ll start it and then hand it off to Shawn because I can tell you a little bit about what we’re seeing with customers. I think, internal research shows us that our customers value our brand more than they ever had. So at the same time, while we’re discounting less, we’re perceived as a higher value, which I think is a really a result of the team really working to create a great product, and again, a great program and great customer service. So that’s certainly taking place right now. We’re also seeing, interestingly enough, the more we advertise, we’re also seeing stronger word of mouth advertising start to happen. So we’ve seen that significantly increase as a percentage of our new customers, which is telling us we are starting to get some of that brand traction that we’ve been looking for. So we’re very pleased with that. On the innovation side, I’ll defer to Shawn on any comments on that.

Yes, nothing new to add on the innovation side. We believe things are on track. We look forward to our new product launch later this year, and we’re excited about the future, lots more to come.

All right, thanks very much, guys. Good luck.

Thank you.

Thank you.

Thank you.

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

Good morning, and congrats on very strong numbers. I just wanted to get a little bit more color on trends that you sort of saw in the later part of April that sort of drove this strong performance relative to your outlook. And I think Donna; you mentioned that it was largely related to the warehouse throughput. Was there anything else that sort of drove this out performance? And maybe sort of what drove this warehouse efficiency? And does it create any sort of revenue recognition pull forward for you going forward? And then I have a quick follow-up.

Good morning. So the warehouse throughput is something that the finance team has to estimate in looking at what we think the capacity is, and the warehouse really rallied. We did not have them work any extra hours or anything else, it’s just that they were able to get more inventory out that we had estimated. Again, we do a very conservative estimate, because we don’t want throughput to be the thing that drives our revenue. So what we do is, we do very conservative estimates on what the warehouse capacity is coming in at the end of the quarter. And the teams did a great job in accelerating without working any extra time. So that’s really what that is. And do we feel that we brought or pulled any revenue forward? No, based on what we’re seeing. For the guidance we’ve provided on Q2, you can see that we do not feel that we’ve pulled any revenue forward into Q1.

Got it. That’s very helpful. And secondly, obviously very impressive showroom growth this quarter, sort of how are you thinking about the dynamic between showrooms and Internet sales as the reopening continues?

Yes, we’re look, we were being very consistent where we’re been historically, which is we know, in trade areas where we create physical touchpoints, and showrooms are our primary source of touchpoints right now we see a dynamic that strengthens the brand in a synergistic between eCom and showroom. So we will continue to grow showrooms and we will continue to penetrate a lot of trade areas with asset light executions, such as the concierge is. We’ve discussed things like the potential of kiosk tests as well and as well as the potential for Best Buy in the future. So strengthening our touchpoints, our ability to touch as many customers as possible, will continue to be something we’ll do aggressively, but we’ll do it in a way that really looks at the highest potential return on capital, while delivering the best brand experience. So there will be a continued development of a strong touchpoint strategy over the next three to four years.

Got it, thank you both.

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

Hi, good morning. I too want to add my congratulations on a great quarter. Great start of the year.

Thanks.

So my first question, just with regard to sales, and clearly sales strong in Q1 and then the guidance suggests continued strength in Q2, but are you seeing any regional differences as the economy now is reopening different paces, different places, are your stores perform -- your showrooms performing differently, different parts of the country, different reopenings activity?

Not anything particular of note. I would say that our showrooms have been performing during the pandemic period in relationship to how open the markets were. And I think what we’re seeing now is, as we’re getting back to a, I guess it’s called a new normal we're seeing strength across the whole business, nothing in particular to note right now.

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Yes, we continue to look at, really, I think the ultimate way of looking at it is and again, a CAC to CLV ratio in a trade area, which includes showrooms as well as eCom. And they’re so interconnected, it’s hard for us to separate the businesses. But we’re certainly looking at them that way. So we look at them, including the, and in those costs are unlike I think what a classical direct-to-consumer company would do. We include the incremental either brick-and-mortar or capital touchpoint, capital and the touchpoint costs in order to do it and that’s what I think is going to allow us continue to be very efficient. But if you look at it at traditional measures, we’re seeing efficiency at classic sales per square foot as high as it’s ever been. What we’re seeing is conversion rates and our showrooms as high as they’ve ever been, because they’re being driven by a lot of pre-shopping online. So the historical ways, if you looked at the business are as efficient as they’ve ever been, but that’s just, we’re getting more and more away from that, and getting to more of a trade area valuation of the businesses as we go forward, which is much closer to I think a lot of the commentary that that Shawn has alluded to about CTC being closer to the customer. Really thinking about these trade areas is total deployment of company assets in order to create strong brands at the local level.

Okay, thank you very much. I appreciate it, congrats again.

Thank you.

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

Great, thanks. So, two questions from me. the first question is, Shawn, I feel like we’re in the middle of a home super cycle meaning that if you think about calendar 2020, 2021, 2022, 2023, you’re going to have a period of very strong sales growth in the home category, not just because of the pandemic, but also because of economic stimulus. A large amount of money is tied up in savings right now and the move from consumers to suburban locations from urban. So I wanted to get your thoughts on that. And then two, Shawn and Jack, you’ve talked about historically, how because Lovesac is a relatively young company, historically you’ve grown through periods of economic weakness, but how should we conversely think about your ability to grow over the next couple of years during a period of at the minimum elevated interest in the home, if it’s not a home super cycle? Thank you.

Yes, thanks, Tom. I would agree, there are many trends afoot that are good for the home and we believe that we are good for the home. We will continue to innovate on things in our own unique way, our Designed for Life way. And that continues to be extremely rare in the landscape. And so the trends you mentioned, I think are all spot on. There is a lot of money washing around. There are a lot of savings as we all know now, that have accumulated throughout the pandemic. Clearly people will go out and revenge spend and get back to their normal lives, we accept that. At the same time, if Lovesac is a microcosm and some kind of typical American company, we are now primarily remote. And in fact, much of our headquarters staff has chosen to relocate, some far, some close, some just a little closer to maybe grandma’s house, not across the street from the office necessarily. And as that movement happens, not of course amongst our own crew, but much more broadly, and it may be a few more years of those kind of policies unfolding as some companies choose to be more advanced in their reaction to this change, and some choose to be slower. Market forces will drive it there, because people will want to live where they want to live and work for companies they want to work for. And so we believe that that is extremely positive, particularly as we know, for the couch category. The number one driver, the number one outside driver of couch purchases is people moving and that’s going to be going on for years, as we’ve acknowledged before. And so, we would agree with you we’re very optimistic and bullish on our own prospects.…

Great, thank you, Shawn. Thank you, Jack. Thank you, Donna. Great quarter.

Thank you, Tom.

Thank you.

Our next question is from the line of Matt Koranda with ROTH Capital. Please proceed with your questions.

Hi, guys, thanks. Just two questions, first one on SG&A. It just seems like headcount costs aren’t coming back as telegraphed each quarter and it sounds like they may still come sort of later this fiscal year. But maybe I just wanted to see if you could highlight is there a dynamic happening? Where you’re having trouble filling roles or are we just sort of kicking the can a little bit each quarter on hires, maybe just talk a little bit about that dynamically?

There’s no kicking the can and I think it's just, we may have been a little bit more positive in how quickly we thought we could recruit or bring in people. But there’s no intentional moving anything down. So we still intend to hire from the original plan, it’s just shifting a little bit to later in the year, we have quite a few hires that need to be made and we want to make sure we’re making the right hire. So the process is may be taking a little longer than what we had anticipated. Hopefully, that’s helpful.

Yes, and just to add a little bit of color, I think it -- there is obviously I know, there’s a tight labor market and everybody is thinking about it from that perspective, I can tell you that. Pretty cool and actually, quantitatively, we’re seeing more responses to any of our recruiting ads than we’ve ever seen. So we’re seeing the same type of stickiness with the brand, as a recruiter, which is resulting in really great talent coming in. I think our appetite was probably bigger than our ability to digest as many hires. And part of that is also because we’ve incorporated a really good on boarding process, which is then really great for our associates, and may have reduced our throughput, but it’s increasing the quality and the stickiness, I think of our internal associates as well. So we’re going to continue to go towards the investment levels we’ve always talked about. It just may not come in the constant rate that that we’d like it to.

Okay, that’s helpful. And then just on the high 40%, revenue growth guidance for next quarter, I wanted to see if maybe you could talk about the breakdown as to how we see it playing out between showroom, Internet and other. And is any of that outlook, I guess predicated on a ramp up of shop-and-shops, or additional sort of other revenue coming back online from Costco or whatnot, it’d be helpful to get your thoughts there.

I think that the business has been coming in consistently with what we’ve been expecting. And what I would do, I think is the best way to look at it is, and I think you saw it as we quoted a lot of our numbers, we look at two-year comps to even out things, because the dynamics of the pandemic and I think if you look at a two-year comp basis, other than some dramatic changes during the immediate post-pandemic period, you’ll start to see trends that are more easily trackable across the different segments of our business.

Okay, that’s helpful. I’ll jump back in queue. Thanks guys.

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

Great. Thanks very much for taking my questions and congratulations on the great start to the year. I wanted to ask about the promotional activity, and just broadly, how you think about pricing? And just thinking from a big picture perspective here, I mean, it sounds like you’ve been kind of cutting back on discounting and promotions in response to supply chain constraints, but great problem to have your sales growth has actually been accelerating. As you kind of think about that and look at what you experienced in Q1, is it possible that your product has just been under priced historically, and going forward? There’s an opportunity to be less promotional or think about pricing a little bit differently?

Good question. I think that the -- I would say the, our product hasn’t been underpriced, historically relative to the brand that we’ve had. But as we’ve really started to execute, in the last couple years, what we have seen is a significant increase in the value of the brand in the minds of our customers. And so I think in terms of the service improvements, delivery improvements, quality of the way we package the product, the products themselves, we’re seeing a higher customer that expects and is getting a lot more value for the product they pay. So I think that we certainly, and our desire would be to continue to grow dramatically and invest the dollars historically invested in discounting and product innovation, and marketing and expansion. So as we see these opportunities, we will take them. Now, I think historically, we’ve been pretty conservative and we also know that right now we’re in a benign environment, which because of our, I think agile execution last year has given us an opportunity. And we want to make sure as we look strategically, for strategically in terms of price value relationship, we don’t get too focused on what’s happening right now. Because I think it’s a very dynamic environment. So we’re seeing great trends, we’re seeing things happening that really show traction on the brand, as we’ve discussed, not only increasing ROIs and advertising, increasing word of mouth, but increasing value relative to a product that’s actually being discounted less All good signs and we intend to operate the brand as a premium brand, and really win through stickiness of the brand and surprise and delight to the customer. So strategically, we’ll pursue that. But we’re also very aware that in the past 12 months, we’ve seen some dynamics that may be again, transitory and we want to make sure before we make any long-term decisions, we know exactly the right way to go.

Great, that's really helpful. Thanks, Jack.

Thank you. At this time, we’ve reached the end of our question-and-answer session and I’ll hand the call back to management for closing remarks.

Yes, thank you so much for joining us for our fiscal 2022 Q1 earnings call. We appreciate everybody’s support. We are very appreciative of our entire #Lovesac family team who continues to deliver tremendous results and we look forward to continuing the conversation with you.

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