The Lovesac Company (LOVE) Q2 2022 Earnings Report, Transcript and Summary

Greetings. Welcome to The Lovesac Second Quarter Fiscal 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. At this time, I will turn the conference over to Rachel Schacter, 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, our 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 measure 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. I will begin by reviewing the highlights of our second quarter financial and operational performance before Jack outlines our second 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 related to our outlook. We are very pleased with our second quarter results as the momentum from Q1 continued into Q2 and we achieved our highest quarterly growth rate ever reported as a public company. This was on top of the 28.7% sales increase, we reported in Q2 last year. Our 65% quarterly growth rate in Q2 is even more noteworthy when taking into account that it builds upon three years of a sustained 44% CAGR with only a slight attenuation in our growth rate last year during the pandemic even with limited showroom operation to that time. Even on a two-year basis, we are achieving very strong results. Bottom-line, we believe our continued success stems from the huge gains we are making as a brand in terms of awareness and conversion while actively managing the tight supply chain environment. We remained almost always in stock, delivering nearly all orders direct to the consumer in just days. Throughout the active pandemic and amidst a turbulent supply chain backdrop. Customers are recognizing the competitive strength of our unique product and are notable in-stock positions, which is evident in our Q2 results and our continued market share gains. The strength on strength in demand, we continue to experience now gives us confidence to test into new pricing and promotional scenarios to drive margins over the long-term. Now let me review the highlights of our second quarter performance. Total sales were 102.4 million up 65.4% versus the prior year period including 290.9% growth in comparable showroom sales. We delivered total comparable sales growth of 39.5% and continued to be very encouraged by the broad base strength from both new and existing customers. We saw strong growth across our showroom and other channels. With the decline of internet sales reflective of channel shift back to our showrooms are now fully opened. Adjusted EBITDA significantly increased to 12.4 million for the quarter from 2.2 million in the prior year period, driven primarily by gross margin expansion. And we also saw SG&A leverage which Donna will discuss further shortly. Our strong second quarter and fiscal year first half '22 results continued to reflect a combination of a strong demand environment along with our execution against our key strategic initiatives including product innovation, efficient marketing and merchandising strategies, creative utilization of our showrooms and other channels to expand customer touchpoints and making disciplined infrastructure investments. Jack will discuss in detail a progress on our key growth strategies. So I will just focus on some key quarter two operational highlights. Starting with our brand presence across showrooms and channel partners. We opened seven showrooms during the quarter and remained on track to open 28 total for the year. Showrooms remain an integral part of our omnichannel strategy. Bestbuy.com continues to perform well, with demand sales increasing 44.3% versus Q1. We are on plan to open more Best Buy shop-in-shops for the second half of this year and into early next year with preliminary plans to open over 15 additional shop-in-shops. Additionally, Costco road shows continue to perform well and exceed our expectations. Regarding product innovation, our teams are constantly coming up with new and innovative ideas to complement our Sactionals and Sac platforms. Two weeks ago, we celebrated the launch of the very limited-edition Sac covers created in collaboration with international fashion designer Jeremy Scott. Jeremy is the face of the Italian fashion house Moschino and the Making the Cut TV series. Initial sales are strong and key placements are a few handmade Jeremy Scott cutters sac are landing with major celebrity names now. To that end, we have already seen exposure for this high-profile collaboration with key outlets like Us Weekly and Hypebeast. In terms of our major product launch, we are planning for an introduction and announcement before the end of this third quarter. And we are very excited to finally bring to market this long anticipated new and patented innovation that we are confident that Lovesac customer will be very excited about. In terms of our marketing and branding efforts. We continue to be pleased with the results of our marketing campaigns. These efforts are driving higher than expected marketing ROIs based on what we see as very strong leading indicators of brand strength. Jack will elaborate on this further. As it relates to the broadly discussed supply chain backdrop, we like others in the industry are facing supply chain headwinds, which we view is more temporary in nature. Through numerous tactical adjustments and promotional pullbacks, we have actively managed gross margins higher in the first half of the year as a hedge against the rising cost and bounce rate due to container shortages and shipping inflation. As you are aware, we have deliberately and strategically built a geographically diverse supply chain with manufacturing in Malaysia and Vietnam, along with China and Indonesia, as well as the U.S. to create redundancies that we view as critical to ensure short lead times and strong and stock positions. We have deep and tenured relationships with our partners and represent a significant portion of their business. To illustrate in reaction to recent COVID escalation in Vietnam. Our Vietnam manufacturer built more dormitories on site to provide housing for more employees wishing to voluntarily shelter on site and continue working through the pandemic to avoid shutdown. While just one example it illustrates the importance of our business to our key vendors, many redundant geographies. In addition, over half of our vendors have been working with us for more than a decade. These strong relationships have provided us with unique strengths and allowed us to stay ahead of the curve as we navigate current challenges in the supply chain environment. We are working to mitigate the intensifying supply chain headwind through a variety of efforts. These include redirecting more POs to China, building on hand raw materials inventory here in the U.S., directing inbound freight to more U.S. ports and using transload services, leveraging air freight for our top selling cover SKUs. On the ESG front, we look forward to making our first ever formal ESG disclosures and reporting in Q4 this year. We also continue to develop our circle to consumer or CTC philosophy, and plan to deliver more high quality sustainable manufactured product platforms in multiple categories across the home space paired with services and programs that will help us build long-term relationships with our most valued customers. CTC is the next evolution beyond the DTC business model, where the DTC model focuses on delivering goods direct to the consumer in the most efficient ways. CTC does the same, but further requires a commitment to a circular way of doing business that is more localized, looped, and long-term focused. The CTC way of doing business will not only deliver more sustainable outcomes over time, but it will propel Lovesac to become more competitive as a brand in the marketplace and more compelling to customers through our focus on long-term outcomes. Our products already last far longer than most and are thus more sustainable in that way paired with programs and encourage more customer interaction and services that surprise and delight these precious customers, we believe we will not only keep them engaged with us but can win them over with our next round of product introductions that will follow for years to come. So in summary, we are extremely pleased with our second quarter results from both the financial and operational perspective. Our business is very well positioned within the home furnishing category and our continued strong results are reflective, not just at the strong demand environment, but importantly, a result of our category disruption, industry leading in-stock positions and market share gains. As we look to the remainder of the year, we expect the environment to remain dynamic and we are faced with the same tie supply chain conditions you've heard discussed by so many. Our diversified supply chain and mitigation tactics give us great confidence in our ability to navigate that challenging supply chain environment, while we remain focused on executing against our key growth strategies to drive long-term value for all stakeholders. With that, I'll hand it over to Jack to cover our strategic priorities and progress. Jack?

Thank you, Shawn, and good morning everyone. We're very pleased with our second quarter results and the strides we've made against our growth strategies, which I will now review. Starting with one efficient marketing and merchandising strategies. Despite increased cost per click our established digital marketing strategies and tactics coupled with newer initiatives, like SMS marketing, hyperlocal advertising and consideration advertising are driving higher than expected marketing ROIs based on what we see as a very strong leading indicators of brand strength. One, overall media ROI continues to perform above our benchmarks brand health has seen tremendous growth since pre-pandemic, particularly within awareness and perceptions on quality, value, and style within target audience. Source of awareness for purchasers, themes driven by TV and word of mouth with word of mouth growing the fastest overall, and overall digital seems to be filling the top of the funnel more frequently than last year. Social CPM continues to increase on core channels but this has been offset by higher conversion rates. We expect overall media to continue to see cost pressures but anticipate offsetting a higher conversion. We have scheduled refresh of TV and social creative during the second half of the year. We also have testing plan on new social channels including TikTok, Snapchat and Reddit. These tactics combined with a strengthening of the brand proposition and advantaged inventory position have enabled us to shorten as well as reduce promotional campaigns and discounting by approximately 900 basis points year-over-year in the second quarter, which is a key driver in helping us mitigate the supply chain headwind impacts. Our merchandising strategies are also driving continued mixed benefits as customers are increasingly gravitating to the premium priced and higher margin Love soft covers. On the omnichannel front, we have added additional automated touch points to support showroom conversion, including a quote trigger email which was launched in the second quarter. This is aided in stronger showroom conversion and the teams are collectively looking to iterate customize further and seek out new areas to create automation for an omnichannel success. Secondary showroom operations, we open seven showrooms in the second quarter and remain on track to open 28 for this year. Our showrooms continue to be an important part of our omnichannel strategy and added capabilities. Like on the spot scheduling and showroom post purchase specialists are enhancing the shopping experience. Throughout the second quarter, the post purchase specialist team continued to expand their reach across both physical touchpoints in ecommerce customers. In Q2, these post purchase specialists communicated with more than 90% of Lovesac customers whose purchases met the predetermined dollar threshold for their service and on average drove a five point lift in post purchase CSAT for customers who engaged with a post purchase specialists versus those who did not. Customers continue to leverage one-on-one appointment services even as showrooms return to normal operating models. These appointments continue to drive stronger results than a traditional walking customer, converting it over 40% and counting for approximately 17% of showroom demand year-to-date. We continue to plan to test the new customer 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 touch points. We'll also be testing a mobile concierge service in several markets. They will also serve as additional touch points in trade areas where we have an opportunity to gain incremental business in an asset light manner. We continue to monitor the pandemic situation carefully and prioritize the health and safety of our customers and team members. We learned a lot in 2020 and have plans in place for a variety of operating scenarios. Third area expanding channel presence. We're very pleased with the strength of the Costco business which we're hosting our online roadshows directly on the costco.com. We've seen productivity increases year-over-year driven by an expanding premium cover offering and Love soft, we're looking to expand our presence digitally with four shows and two Sac events planned for the second half. And we're also exploring potential physical touchpoints in the future as well. We continue to be excited about the partnership with Best Buy and remain on track with our expansion plans to open more shop-in-shops in the second half and early next year with preliminary plans to open 15 additional shop-in-shops. We've also seen our bestbuy.com business increased by 44% versus Q1 in terms of demand. This is due to improvements in our customer experience on bestbuy.com as well as some marketing tests that we've run. We'll continue to pursue opportunities with other partners. Area four, making disciplined infrastructure investments, starting with ecommerce in the second quarter conversion rate improved 33% over last year, with the most significant growth in mobile conversion rate from which we see most of our traffic. Elevating customer experience remains a focus and in q2, we launched almost 20 associated enhancements, most notably an upgrade to the product configuration experience, introducing new technology to improve the visual quality of the product covers, rendering them much more true to life in the 3D experience. Another major enhancement is the introduction of Apple Pay to the checkout experience, which significantly shortens the conversion funnel for customers utilizing that payment methods. Regarding supply chain updates, we continue to make improvements across areas including delivery, reducing costs, increasing efficiencies, and mitigating risk. We have secured additional space in Illinois, Pennsylvania, and California to get in front of the holiday demand as well as next year's demand. And notably, our year-over-year footprint grew by over 45% year-over-year in the second quarter. We remain focused on inventory investment due to longer lean times and this will be evident in our second half inventory levels. Like others we are contending with freight and cost pressures, import delays, and localized temporary raw material shortages. As Shawn mentioned, we have implemented several mitigation tactics to help offset this disruption. So in summary, we continue to scale the brand and the business as underscored by our strong quarterly performance, which punctuates 14 consecutive quarters of 25% plus growth since going public. Our brand is gaining traction with word of mouth driving the biggest year-over-year changes in awareness. At the same time, our value proposition continues to grow, despite a reduction in promotions and our teams have done a great job in managing our inventory position. As we look to the back half of the year, we will continue to capitalize on our competitive advantages and leverage our strong in-stock inventory position, along with a great value proposition and pricing to optimize demand and margins. With that, I will hand the call over to Donna to review our second quarter financial results. Donna?

Thank you, Jack. Good morning, everyone. I will begin my remarks with a review of our second quarter results and then provide an update on the framework I shared with you last quarter as it relates to how we are approaching the remainder of fiscal 2022. Net sales increased 40.5 million or 65.4% to 102.4 million in the second quarter of fiscal 2022 as compared to 61.9 million in the prior year period. This net sales increase was driven by both our showroom and other channels. The increase in these channels was partially offset by a decrease in our internet channel net sales against a period of elevated digital sales last year given the pandemic related showroom closures and shift to online purchasing. Showroom net sales increased 49.7 million or 387.1% to 62.6 million in the second quarter of fiscal 2022 as compared to 12.9 million in the prior year period. This increase was due primarily to a $40.3 million increase in comparable showroom point of sales transactions to 54.1 million in the second quarter of fiscal 2022 as compared to 13.8 million in the prior year periods due to limited showroom operations in the prior year as a result of COVID-19 as well as the sale shifted back into in-person shopping. As a reminder, point of sales transactions represent orders placed through our showrooms, which does not always reflect the point at which control transfers to the customer and when net sales are recorded. In addition, we opened 26 additional showrooms since the second quarter of last year, which was a meaningful driver of the non-com showroom sales increase. Other net sales, which includes pop-up shop and shop-in-shop net sales increased 7.4 million, or 243.4% to $10.4 million in the second quarter of fiscal 2022 as compared to $3 million in the prior year period. With this increase related to more online pop-up shop events this year, and the reopening of our shop-in-shop locations that were closed in the prior year quarter due to COVID-19. Internet net sales, sales made directly to customers through our ecommerce channel decreased 16.6 million or 36% to 29.5 million in the second quarter of fiscal 2022 as compared to 46.1 million in the prior year period, with the year-over-year decrease driven by the comparisons against elevated digital sales in the prior year period and the channel shift back to our showrooms, which were all open during the second quarter of fiscal 2022. By product category or sactional net sales increased 66.5%, Sac net sales increased 48.9% and our other category net sales, which includes decorative pillows, blankets and other accessories increased 192.6% over the prior year quarter. Turning to our gross margins. The 749 basis point increase over the prior year period was driven by a 506 basis point improvement due to a reduction in promotional discounts, higher overall sactional product category net sales and premium covers mix impact and also lower product costs related to vendor negotiated tariffs mitigation initiatives due to higher volume. Distribution expenses improved by 243 basis points over the prior year period, due to a leverage of 793 basis points in warehousing and distribution costs relating to higher net sales volumes. This was partially offset by an increase in inbound freight costs of 550 basis points due to escalating inbound container costs, as well as some shifts with inventory purchases back to China, which are impacted by the 25% tariff rate. This shift is to help alleviate container congestion coming from our other overseas vendors. The diversification of our supply chain allows us to continue to be nimble and shift inventory purchases between vendors to ensure we remain in stock for most if not all SKUs. We exceeded the second quarter net sales in gross margin expectations we just shared with you on our last call. The increase in net sales was primarily driven by higher sales volume during key events such as July 4, combined with lower promotional discounts during these periods. The increased gross margin percent in the second quarter of fiscal 2022 as compared to our second quarter guidance and prior fiscal year period was the result of continued supply chain headwinds mitigation efforts, such as reductions in promotional discounting issued during the first half of the fiscal year, which was done to help soften the projected gross margin impact of the increase in cost of inbound freight on the second half of fiscal 2022 that most if not all importers are experiencing. In addition, we also realized benefits of higher leverage on warehousing and distribution costs originally projected due to the higher net sales volume. The 51.3% year-over-year increase in SG&A was driven largely by an increase in employment costs as we made some HQ and showroom hires that were put on hold last year due to COVID-19. We also had higher rent expense related to the 26 additional showrooms and higher selling related expenses with the increase in net sales, partially offset by lower negotiated online pop-up shop fees as compared to the prior year period. Overhead expenses increased primarily due to higher equity compensation expense resulting from an acceleration of expensing equity compensation related to a trigger event in the second quarter, as well as an infrastructure investments to support our continued growth. SG&A expense as a percent of net sales decrease 3.2% due to expense leverage in multiple areas, such as infrastructure investments, rent, insurance and selling related expenses, partially offset by deleverage and employment costs, equity based compensation and travel. The deleveraging certain expenses relate to the investments into the business that were put on hold in the prior year related to COVID-19 as we anticipated, and which we discussed on our first quarter earnings call. SG&A expense was lower than our expectations in the second quarter principally related to the delay in hiring to the level that was anticipated in both our headquarters and showroom locations and the shift of some of our infrastructure investments into the second half of the fiscal year. These shifts were partially offset by higher credit card fees related to the increase in net sales for the quarter. Advertising and marketing expenses increased $5.9 million, or 81.9% to $13 million in the second quarter of fiscal 2022 as compared to $7.2 million in the prior year period, due to the reinstatement of marketing spend to support sales growth, as showroom locations were fully open. Advertising and marketing expenses were 12.7% of net sales in the second quarter of fiscal 2022 as compared to 11.6% of net sales in the prior period. The 116 basis point increase was due to increased media activities and higher media costs compared to the prior year period which was impacted by COVID-19. Depreciation and amortization increased to $100,000 from the prior year period to $1.6 million, principally related to capital investments for new showrooms. In the second quarter of fiscal 2022, operating income was $9 million, compared to an operating loss of $1 million in the second quarter of last year with the increase driven by the net sales in gross margin increase as well as the SG&A leverage just discussed. Net interest expense for the quarter was approximately $45,000 principally relating to unused line fees on a revolving line of credit. Tax expense in the second quarter of fiscal 2022 was $515,000 as compared to $34,000 in the prior year period related to minimum state income tax liabilities. Before we turn our attention to net income, net income per diluted share and adjusted EBITDA, please refer to the terminology and reconciliation between each of our adjusted metrics and their most directly comparable GAAP measurements in our earnings release issued earlier today. Net income was $8.4 million, or $0.52 per diluted share in the second quarter of fiscal 2022 compared to a net loss of $1.1 million, or $0.08 per diluted share in the prior year period. We generated adjusted EBITDA of [$12.8 million] [ph] in the second quarter of fiscal 2022 as compared to adjusted EBITDA of $2.2 million in the prior year period. Turning to our balance sheet, our liquidity continues to remain strong as we ended the second quarter with $68.5 million in cash and cash equivalents and 22.5 million in availability on a revolving line of credit, with less than $1,000 of outstanding debt on the revolver related to the timing of the ABL fees being charged to the revolver. Please refer to our earnings press release for other details on our second quarter fiscal 2022 financial performance. Regarding our outlook, as we said during our Q1 earnings call, we are still operating in a pandemic environment with a wider range of potential outcomes as it relates to fiscal year 2022. Given this, we are not providing formal outlook for the full year, but we'll share an update on the framework that we provided during that call that we are hopeful as you are updating your models. We are targeting another year of strong sales growth with approximately 28 showroom openings and we expect to restore expenses that were pulled back in fiscal 2021 due to the pandemic. We will continue to strategically make infrastructure investments to support the substantial multi-year growth opportunity that lies ahead. With the additional showroom openings and strong year-to-date performance, in a scenario where sales growth is in the mid 40% range, we would expect adjusted EBITDA margins in the 6% to 7% range with the year-over-year adjusted EBITDA margin decline driven by both gross margin pressure of approximately 150 basis points as compared to the prior fiscal year, as we, like others in the industry are facing intensifying freight headwinds, as well as the expense in infrastructure dynamics I just discussed. We have been and will continue to be very disciplined on the expense side to help offset the gross margin pressures. For our fiscal third quarter, we expect sales growth of approximately 50% with negative adjusted EBITDA dollars in the $3 million to $4 million range compared to positive adjusted EBITDA in the same quarter last year. Adjusted EBITDA is being impacted by the expected lower gross margins of approximately 530 basis points year-over-year due to the increasing supply chain headwinds and the efforts being placed on strategic expense reinstatements and infrastructure investments needed to support the growth of the company that were put on hold in fiscal 2021 as part of our COVID-19 financial resilience measures. We are still expecting to end fiscal 2022 in a healthy cash and cash equivalent position and now expect CapEx to be in the $17 million to $18 million range given our current view of 28 showroom openings this fiscal year versus prior view of 25 shared last quarter. So in conclusion, Q2 exceeded our expectations from both a net sales and profitability perspective. As we look back on the last 18 months, what stands out is the execution of the outstanding Lovesac team members who despite the COVID and supply chain challenges have driven exceptional results. We cannot be prouder of their great work. And we are all focused on being nimble and flexible as we continue to navigate a dynamic operating environment and position Lovesac for sustainable long-term growth. With that, we would now like to turn the call back to the operator who can open it up for questions. Operator?

Thank you. We'll now be conducting the question-and-answer session. [Operator Instructions] Thank you. Our first question is coming from the line of Tom Forte with D.A. Davidson. Please proceed with your questions.

Good morning. This is Clark Wright from D.A. Davidson talking on behalf of Tom Forte. Thanks for taking my questions. My first one is just for you guys would be from your vantage point, do you think consumers have scaled back their purchases in the home category? From our vantage point, it seems clear to us that they're spending more money on travel as reflected in the TSA throughput data?

Hey, Clark, this is Jack, I'll start that and Shawn or Donna, please add on to it. Well, I think what we're seeing due to the disruption we're making in the industry that we're not seeing any dynamics industry-wide in terms of changes in buying behaviors that relates to our brand. As we discussed earlier, we're seeing conversion rates that are higher than they've ever been, which I really think is we're winning in the awareness to decision making part of the funnel which is farther down than obviously consideration. So while there are things happening, I think in the macro market, which have been headwinds or tailwinds for some of our competitors that are in more of a static growth rate, we are seeing continued strength based on all of the measures we do for brand health. So I can't really comment on those sector changes because we just can't see those within our brand data right now.

Thank you. And then just my second question would be even with the challenging supply chain, you're able to get consumer couches faster within the competition. Do you think this is a greater -- an even greater competitive advantage today?

Yes, absolutely, we know it is. I think part of, obviously part of the purchase product process is to get the product and enjoy it and use it. And we are continuing to have industry leading service levels, which we're very proud of driven by not only a product that's evergreen in nature, but a series of decisions the teams have made to really put us in a great stock position. So it is clearly in this environment giving us a competitive advantage that we really want to take advantage of because we continue to -- while there's a pandemic going on, our objective is just to disrupt the category and continue to gain share which we are doing.

Thank you. Great color.

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

Thank you. Great quarter. Congratulations on the results in a very tough environment. I first wanted to ask Donna, if you could just unpack the components of the Q3 gross margin expectation, the decline on 530 basis points just -- if you could just articulate the puts and takes around that? And also if you could quantify what the infrastructure expense that was pushed out from Q2 into the second half how much that was? And then I have a follow up?

Yes. Good morning. So yes, the puts and take on the gross margin are essentially net-net. The negative impact is 100% related to inbound freight. We're no different than other importers. We're currently seeing an 85% increase on our container costs coming in from overseas. And then there's a slight piece of that too that relates to our diversified supply chain, which gives us an advantage as well. So where we see container congestion may be coming out of Vietnam, we're able to shift inventory purchases over to our vendors in China. And we know that the inventory that comes in from China is impacted by tariffs, but it allows us to stay in stock on our inventory, which is super important to us as it is to our customers. We have and we continue to reduce promotional discounting, which is helping us mitigate those. And I think on an overall, given the 85% container increase, the impact, and the way that we've been able to mitigate in the first half of the year, seeing these costs come down the line to only have we're seeing 150 basis points impact on our gross margin year-over-year has been very strategic for us. That does -- does that answer that piece, the gross margin question? And then on the -- does that, Camilo?

Yes. So just to clarify, you're talking about Q3 total gross margins have been down 530 basis points, given all the puts and takes that you just articulated?

Correct. Yes.

Okay. Okay, perfect. And then just the infrastructure spend and how much of that has been pushed out of what you thought was going to happen in Q2 that now looks to be more back half realized?

Yes. It's probably, I don't have the exact number. I would probably say it's probably close to $1.5 million knowing what I know and being so close to the financial statements. But the other piece of that is not only infrastructure investment, but the timing on HQ and showroom hires, which has been -- that was not strategic to push out those hires. We're just making sure that when we bring our players on the team, they're the A players. And our onboarding and our interview process is very extensive. And we were probably a little too aggressive in thinking that we can onboard as many people as we thought we were going to do at the beginning of the year. So that's probably on an SG&A and that's not necessarily a shift, that's we'll call it a save. That was not strategic, that was just timing, but the infrastructure investments themselves, I would probably say they're probably close to $1.5 million that were shifted out to the second half of the year.

That's great. Thank you. And then Jack, you gave some great detail on your marketing ROIs. I'm wondering if you could just isolate how you're toggling back and forth between increased media, maybe not media, but more online marketing spend in the face of rising CACs to continue to generate traffic to the top end of the funnel?

Yes, in the top of the funnel, I think a couple of things, one is, we are continuing to get more targeting through use of media like OTT, which has a higher CPM, but it's very effective. In addition, I think overall TV costs have gone up, but we're just seeing brand stickiness as I mentioned it. We're seeing ROIs despite increasing CPMs across the board go up because of, we really believe is the brand stickiness, and I think that indicator is the word of mouth coming out of nowhere to become the leading change and awareness year-over-year, which is pretty amazing. And that provides tailwinds to your efficiency at the media at the top of the funnel. Obviously, the brand equity points that I made earlier also create efficiencies in the middle and the bottom of the funnel in terms of conversion. So we're getting a lot of tailwinds right now that are really generated by the brand just getting stronger. Obviously, I can't predict how long that's going to happen, but we've certainly seen efficiencies continue to bear out positive for us despite a environment this year so far, where marketing costs are increasing.

Is that giving you insights into perhaps dialing back the quantity of spend and still receiving those same level of traffic inbounds from the word of mouth component? And are you seeing that actually in your post purchase surveys?

Well, we certainly started to look at -- we've continued to, I think and is a percentage of the business we've continued to look at more digital and digital becomes significantly more important as we get to hyper-local marketing, for sure. That helps answer a little bit of your question.

Great. And that's all for me, but great job and continued success into the holiday.

Thanks, Camilo.

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

Great. Congrats on very strong results and thanks for taking my questions. So just on Q2 revenue, can you maybe talk about what drove this very healthy outperformance versus your expectations? And so you mentioned strong performance during key events, but is there anything else that was maybe different from what you expected? And then I have a quick follow-up.

I think the biggest and Donna and Shawn, Donna will probably have much better color on the details. But overall look, we had overperformance in both showrooms, while showrooms had obviously very strong comp growth, both to LY and LLY, and they definitely exceeded our expectations. The web is welded because it's LLY, numbers were outstanding as well at 351. So what I would say is our organic business beat our expectations, as well as that business -- sorry, our business development segment, which is the Costco and Best Buy also. So really, we're seeing strength across all segments. We do see dramatic increases in strength during promotional periods. And I think that's because of the growing brand strength and benign promotional environment causing people to really engage with us during those periods. And that's a real opportunity for us as we go forward as we strengthen our pricing proposition, as well as look to manage margins in the fourth quarter.

Got it. Thank you, Jack. And sort of, it seems like you widened your customer base pretty significantly over the past several quarters. Can you maybe just refresh us on who your core target customer is today and how that may have changed sort of now coming out of the pandemic?

Well, I don't think really our core customer has changed dramatically. We're attracting a lot of new customers across the board, but that core, young parent, want-it- all is critical to our business, and our engagement with them are really the real indicators of future growth as well. So we're doing very well with that group. Our awareness is growing dramatically. And the young parent want-it-alls are the older millennials that are engaging in either looking to buy a home or expanding their family and they're right in our sweet spot. And what I can tell you is among them, not only awareness has gone up, but engagement and awareness of the brand values and alignment with Lovesac brand is a brand that represents their values. So we're very pleased with that and that continues to be our sweet spot.

Great. Thanks so much for the color.

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

Hi guys, thanks. Wondered if you could maybe just talk about quarter-to-date trends in the context of the 50% growth guidance for the quarter that you provided? How was Labor Day just maybe qualitatively at least that'd be helpful?

Donna, do you want to hit that or?

I was on mute. Sure, okay, I could start with that. Labor Day was very good. I mean, from what I can share, we had a very strong Labor Day weekend, actually stronger than what we had projected internally to happen. We had a strong promotion that we ran, I think for four days over Labor Day weekend and it was very well received, and that could be because we've pulled back on discounting over the last handful of months. So, yes, people embraced our Labor Day and weekend promotion, so very strong. The year-over-year growth of 50%, just to remind everybody, any of the guidance or we'll say framework that we have provided in the past did not account for any of our new initiatives, because we were early on in the year, so we just needed to make sure some of these new initiatives we could trigger them when we had plans. So that being kiosks, that being concierges and our new product launch, which is super exciting. So any of the guidance or framework that we're providing to you, the updates are -- and the opening of additional showrooms, right. So originally, we were planning to open 25 and now we're at 28. So the additional or I will say the updates that we're providing to you in order to update your modeling now include all of the initiatives because we are pretty certain at this point in time that they will all be able to happen when we have in our plans.

Right.

Okay, that's helpful. And then --

The only I'll add -- I'll add to that is we certainly saw in the last couple of weeks continued support for the fact that we're not seeing a lot of demand elasticity to decrease promotions. So I think we have a very strong lever we'll continue to look at as we look to manage margins in the third quarter and on into next year.

Okay, that's helpful, guys. And then yes, I wanted to touch on gross margins maybe in a different way here. I guess, I was just surprised that the year-over-year headwind that you're citing, like more than 500 basis points in Q3, understandable on the inbound freight front, but it sounded like there were quite a few offsets and levers you have to pull on sort of lower promotional environments, your existing warehouse leverage that you're getting. Wanted to see maybe could you unpack that a little bit more in terms of the headwind that you're facing, specifically on inbound freight, if you could quantify that, that'd be helpful just so we know what you're offsetting it with?

I can start. So I don't have specific numbers I can share with you other than what I did share a few minutes ago, I guess, on a call with an 85% increase in container costs, right, who would have expected that, that certainly, we had built in our projection somewhere around 50% and maybe even a lower rate on increases, but we're currently at an 85% increase. So as we see those freight headwinds coming toward us, we're very flexible and nimble and agile enough to be able to plan for that in our promotional discounting, and the team has done a great job. As you can see, the gross margins that we came through in the second quarter were far ahead of where we had guided to or even had in our internal plans, right. So that shows you how quickly we can turn when additional information is being presented to us. So those headwinds are really specific to the increase in container costs, and then the shift of bringing some of our product in from China to make sure that we're most -- if not always in stock, right. And again, that goes back to the divert -- the strong diversification that we have in our supply chain. It may cost us a little bit more to bring the inventory in, but we have the inventory, which gives us a competitive advantage.

Yes, just that just really circles back around in my comment earlier, because we're in stock, we're seeing our price value equation, our value equation go up even in a year, we've dramatically decreased discounts, which I think just is a note to we have pricing power to continue to manage things.

Okay, makes sense. If I could sneak one more in just on the EBITDA guide, I guess, I have to step up OpEx quite a bit sequentially to kind of get to the in line with the EBITDA guidance you gave for 3Q and on order of more than $11 million, I believe sequentially in terms of raw dollars, but Donna, I think you cited only like about $1 million of delayed investments. Maybe could you guys just speak a little bit more to the split between maybe SG&A and marketing as you expect it to play out in 3Q and maybe even in the fourth quarter? And maybe just bonus accruals maybe accounts for some of that, but it'd be helpful to get a little bit more color on that one?

Well, so you're saying operating. So the biggest adjustment in that operating margin is the gross margin adjustment. We probably based on what I know that's out there for consensus, marketing spend may be a little higher. It's hard because I don't see a lot in the marketing spend what's out there broken up between marketing and SG&A, I see it more as a total number. Marketing spend, as we mentioned, will be a little higher as a percent to sales in Q3. Probably the biggest reason for that is all the marketing initiatives that we're putting up against our product, our new product launch, right. So as I remind you that the new product launch was not in -- the new product launch was not accounted for, even in our 2Q guidance that we provided or fiscal year framework on our first quarter earnings call. So that new product launch is coming in now full force in the numbers that we're providing to you. And it does involve heavy investments into marketing if that helps. So it's everything --

It makes sense. I'll take gross amount offline.

Yes, it's everything around all of these new initiatives that are coming through now on the top-line, they have support dollars needed to support which are coming through now in marketing and SG&A.

Got it. Makes sense. I'll take gross amount offline. Thanks, guys.

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

Hi, good morning, and thank you for taking my question. Very nice quarter. Congratulations. So my first question and that was a bit of a follow-up just on the supply chain. But I guess the way I want to frame the question is, you look at the results for the fiscal second quarter, you as a company managed extraordinarily well with a very, very difficult supply chain environment. Now the guidance in Q3 would suggest that maybe it -- maybe you're at least leaving room for not managing as well. So, of course, I mean, what's changing, what factors out there could be more difficult for Lovesac to manage in this coming quarter over the balance of the year that we're managing in the second quarter?

That were managed in the second quarter or we're not. I mean, again, the gross margin is just on the principally the container costs. And we do -- we have a, I won't say a competitive advantage, but we are able to mitigate because of our evergreen inventory, we are. It allows us to plan inventory purchases in the most cost efficient manner, but at the same time, we're not isolated from those increased container costs. So our evergreen inventory, like I said, allows us to plan appropriately. We're not bringing in seasonal merchandise that has to come in today. So we can manage weeks of supply of inventory. We can manage timing of inventory. We work with our overseas vendors to make sure that they're -- they can produce to our needs. So we definitely have an advantage on that part, which keeps us in stock. And, but again, we're not isolated from the increased container costs that everybody else is seeing as well.

Yes. And just to add to that, I think sometimes we get caught up into a sequential game, which causes us to perhaps think there's a big trend when there isn't. And what I mean by that is, look, we know this pandemic has had all kinds of fluctuations. We knew ahead of time, we would have headwinds in the third quarter, but we pulled the lever in the second quarter to give us extraordinary margin gains that for the year are going to get us exactly where we want to be. So I think we've got to be really careful overanalyzing the quarter-by-quarter stuff. We're going to land I believe, where we always thought we would, and as we start to look at next year, it's the same thing. We have pricing strength, yes, we have headwinds, we will strategically continue to be a leader in the industry, not only in growth, but I believe in gross margins.

Okay. And then actually the follow-up question I have just with regard to sales, again, extraordinarily strong sales quarter in Q2. So maybe just more from a nuance standpoint, the economy now is pulling away from the COVID crisis. There's been the concern out there that Lovesac among other companies potentially benefited through the crisis because consumers were more focused on this category. So, but your sales strength is holding up, if not strengthening further, as the crisis abating. Are you seeing that the composition of sales or the makeup of sales change in anyways we pulled away from the crisis?

No, it's continuing to be exactly where we want it to be on our core items, especially sectionals, where we're spending our investment and our money on getting the platform out there, because obviously, it'll support new initiatives in the next couple of years and build upon them. So I think we're seeing it flow pretty much in terms of the long-term plan and looking at to your trends, they're about right where we thought they would be.

Great. Okay, I'll leave it there. I appreciate it. Thank you.

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

Great. Thanks very much for taking my question. Wanted to ask about how you're thinking about pricing and promotion. It seems like you kind of described being less promotional a little bit as a gross margin mitigation effort, given the rising supply chain costs and yet it doesn't seem like there was really any slowdown in demand at all. So how do you think about both the ticket prices of your products, as well as the promotions and discounts that you deploy over the next couple of years? Is it your intention to kind of get back to being a little bit more promotional as supply chain costs come down or do you think maybe you're kind of starting to discover that maybe the higher prices are just warranted given the improvements you've made to the platform over the years?

Right. That's a great question with a lot of nuances. What I would say is, we've continued to obviously through this year understand that we can use less promotions at today's MSRPs and continue to get demand that's outstanding. I think the promotional approach is really within the year tactic as we look at it and MSRP is obviously long-term strategic. I think as we're starting to get a longer track on the value, the price value relationship of the brand with the customer, we're going to get smarter about potentially looking at MSRP changes. But I believe in the long run, we will always have some sort of promotional cadence that's associated with the stack more, save more, because internally, we really believe that it helps expose the benefits of the product, the flexibility of the product, the design for life aspects. So what I would say is we're looking at both, one is a strategic platform and one is a, within the year tactical way to manage the dial of demand a little bit more finite. So you can expect adjustments on both areas as we go forward.

Okay, that's really helpful, Jack. Thank you.

Thank you. Our final question is coming from the line of Lamont Williams with Stifel. Please proceed with your questions.

Hi, everyone, thank you for taking my question. Now that we're further into the recovery, could you just talk a little bit about what you're seeing in traffic in the showrooms? I know you've opened some more showrooms off mall. Are you seeing any differences in the recovery in traffic there?

Yes, we are seeing. So we are seeing some differences and it's interesting. I think we're seeing much more robust returns in traffic in areas that are not as cosmopolitan. And we believe it's really associated with the work-from-home movement and some of the more concentrated areas. Now, with that said, we're seeing extremely strong growth across all segments of showrooms right now. And I think what we're seeing if you look at it versus on a two-year basis, we are seeing traffic slightly lower, but with a model that's generating conversion rates of 40%, which are almost unheard of. So it gets back to that touchpoint strategy. We'll continue to exist and evolve and we'll continue to look at the most efficient way to have showrooms, which probably leads us to continue to look at obviously the off malls, as well as some of the other concepts we've talked about.

Okay, all right, great, thank you.

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

Yes. So I want to just offer special thanks to our own team, everyone who has been a part of our #LovesacFamily that played a pivotal role in generating these outstanding results, leading up to and ever since going public, our momentum has never missed a beat. And thank you so much to our investors for supporting us as well. We won't let up. Have a great day.

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