Greetings, and welcome to The Lovesac Fourth Quarter Fiscal Year 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rachel Schacter of ICR. Thank you, Rachel. You may begin.

Thank you. Good morning, everyone. With me on the call is Shawn Nelson, Chief Executive Officer; Mary Fox, 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'd 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 start by reviewing the highlights of our fourth quarter and fiscal 2022 financial and operational performance. Then Mary Fox, our President and COO, will outline our key growth initiatives for 2023. And finally, Donna Dellomo, our CFO, will review our financial results and a few other items related to our outlook in more detail. Before turning to our results, let me first say that our heart goes out to all those affected by the war in Ukraine. Our ultimate guiding principle at Lovesac is, of course, love, and it breaks our hearts to see the human tragedy. While we have no business operations in the Ukraine region, we know our servicemen and women are certainly on alert, and our thoughts are with them and their families. As for our fiscal 2022 performance. Fiscal 2022 was another record year for Lovesac with business continuing to perform extremely well despite the challenging and volatile backdrop. Our strong financial and operational results for the year are reflective of our unique competitive advantages across our people, brand, business model and operating platform. For the year, we delivered a total annual net sales increase of 55.3%, total comp sales growth of 46.9% and adjusted EBITDA of $55.0 million, a 96.1% increase. This incredible growth is stacked on a four-year CAGR of 48.7% growth and comps versus prior year comps of 53%. So this is not just a prior year COVID down-period easy beat. We achieved many operational accomplishments in fiscal '22. Key among these were: we opened 28 Lovesac branded showrooms, two mobile concierge trucks and eight kiosks; 18 new Best Buy shop-in shops, which we operate directly for a total of 21. We now operate a total of 167…

Thank you, Shawn, and good morning, everyone. Our strong fourth quarter and record full year performance are a testament to the strengths of our business model and the agility of our team. As Shawn shared with you, our highly differentiated business is benefiting from a growing product reduction curve as a result of strong relevancy and innovation. In the four months since I joined Lovesac as President and COO, I have really appreciated spending time in our showrooms as well as getting to know all of our associates in all functions and the strategic priorities they are all driving. What stands out to me the most is the passion and commitment of everyone at Lovesac and the consistency of the performance they drive, with 15 consecutive quarters of greater than 25% growth and a CAGR of 48.7% in the past four years. In the last two years alone, our comparative sales have doubled and almost tripled on a 3-year stacked basis. We are very pleased with these record results and the strides we have made against our five strategic growth initiatives, which I will now review. Starting with one, product innovation, of which the key highlights was our StealthTech launch in the middle of October in '21. We continue to be very pleased with the launch of StealthTech, and it is meeting our internal expectations. The only element that has been different to our plan is the customer demand on satellite side per transaction is higher than we had anticipated, and we are actively getting back in stock on this item. The launch generated activity of over 1 billion impressions and was a great jump start to the product launch. Since launch, StealthTech has demonstrated the ability to accelerate Sactionals AOV by over 700 basis points as well as overall…

Thank you, Mary. Good morning, everyone. I will begin my remarks with a review of our fourth quarter results and then provide a framework for how we're approaching fiscal 2023. Net sales increased $66.5 million or 51.3% to $196.2 million in the fourth quarter of fiscal 2022. The year-over-year net sales increase was driven by growth across all channels with an overall comparable sales increase of 50%, which was due to the success of our holiday campaigns; ending showroom count increase of 28 year-on-year; the introduction of eight kiosks and two mobile concierge touch points; higher productivity of our online pop-up shops on costco.com, with one additional event over the prior year; and an additional 18 Best Buy shop-in shop locations as compared to the prior year. Showroom net sales increased $44.1 million or 59.8% to $117.7 million for the fourth quarter of fiscal 2022. This increase was due primarily to a $43.1 million increase in comparable showroom point-of-sales transactions to $102.6 million in the fourth quarter of fiscal 2022 as compared to $59.4 million in prior year period. As a reminder, point-of-sale 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 Q4, while comps or orders increased 50%, at fiscal year-end 2022, approximately $13 million of this increase is waiting to be shipped to our customers principally related to the timing of customers' orders. We also opened additional Lovesac showrooms, kiosks and mobile concierge since the fourth quarter of last year, as I just mentioned, which was a meaningful driver of the non-comp showroom sales increase. Internet net sales, which are sales made directly to customers through our e-commerce channel, increased $11.2 million or 22.8% to $60.4 million in the…

[Operator Instructions] Our first question comes from Thomas Forte with D.A. Davidson. Please proceed with your question.

So first off, Shawn, Mary and Donna, bravo. Excellent year. I look forward to this year. So you sort of touched on this in your prepared remarks, but I want to talk about unaided awareness. So you had a television ad during the NFC title game. It sounds like you also had one during the AFC title game. And then last night, I saw a product reference for your original Lovesac product in the Renee Zellweger TV show. So Shawn, I'm curious on your thoughts on how increasing unaided awareness can drive sales for Lovesac even as we're seeing signs that the home category overall is slowing.

Yes. As I mentioned, I think that we are - thankfully, a big portion of our continued success has to do with timing, not to say that the team hasn't done a fantastic job, that's exactly what they've done. But Lovesac just happens to be at this moment of inflection where we are still small and we have tons of headroom as a brand, as a product adoption, as a moment in that curve where Sactionals have penetrated enough and word of mouth has really kicked in and driving unaided awareness for us, but we're still small. And so for us, at this moment, where the world is in great tumult, where the home category has gone through an obvious cycle that was unpredictable, driven probably by COVID and people remaining at home and all of these factors, we emerge from that in a better place than we went into it. And by the way, we did pretty well through that cycle. And so for us, it's just a confluence of great timing, great execution and great marketing decisions. We are being very judicious in our marketing spend while taking risks and balancing those factors. And with that, our unaided awareness is growing, but the category has grown just as much. And so we continue to have the headroom that we have. And I'm sure that Jack, who by the way, is also available on this Q&A, I might have some comments on this.

Absolutely. Thanks. Tom, I'm still here at least for a couple of quarters, right? Anyway, I think the key is unaided awareness is absolutely critical because we win at conversion. So if you start to get people into the funnel and they funnel down, we know we'd crush it in the conversion funnel. So it is absolutely important, unaided awareness, because it allows us to be a comparable to the other critical products. And when our products are compared, we win every time. So it's critical, and that's why we're disrupting. We're not only fighting for overall awareness, but we're disrupting at the point of consideration. And that what causes the brand to have the trajectory that's well above any of the category trends.

Our next question comes from Maria Ripps with Canaccord. Please proceed with your question.

Congrats on very strong results here. First, you mentioned the success of your holiday campaign, but sort of in addition to that, how much of the top line outperformance would you attribute to having inventory in stock and being able to get it to consumer quickly versus sort of all the new touch points added in the past year between showrooms, kiosks and mobile concierge, et cetera?

Yes. Sorry, just deciding who would jump in. There are so many factors to separate out with - in the business over the last - obviously, over the last couple of years. It's very difficult for us to strip out what growth is coming because of what factor. We - and the main reason for that is the sheer volume of growth. Obviously, it's massive for us. And so any kind of industry movement, any kind of, let's call it, a tailwind from some of the factors you mentioned, whether it's just as simple as being in stock, is extremely hard for us to separate out when the growth is greater than 50%, especially. But we'll take it. We think that, for instance, the element of being in stock over the past - well, over the past many, many years, but over the past year, in particular, has been a huge advantage for us. And it's evidenced not just of like we bought plenty of inventory and we prepared well and the management team is sharp or whatever, which I hope is all true, but it really is rooted in the fundamentals of our product and our business. And we've been pounding the table on that for a long time. And frankly, the tumultuous environment that we've been operating in has been proven ground for the things that we've been saying for years. You got to remember that while Sactionals look like sectional furniture, they pack very, very differently on container ships. They pack very, very differently for last-mile delivery. And through COVID, touchless delivery, no appointments possible in people's homes for all of our competitors, that sort of thing, we rode through with all of these attributes and just continued to sell at a healthy clip because of these…

Got it. That's very helpful, Shawn. And then secondly, I appreciate all the color around StealthTech. But is there any way you could maybe describe the contribution from StealthTech to your Q4 results? And any update on the attach rate? I believe last quarter, you mentioned that it was around 15% or so. And then can you share sort of any color on how this product compares to Sactionals from the gross margin standpoint?

Yes. Maria, it's Mary. I'll start, and then Donna may want to kick in, in terms of overall contribution. So obviously, in terms of StealthTech, as I shared, you've seen that we are very happy with the performance. It's in line with our expectations. And that looks at multiple data points that we are looking for us to achieve in our KPIs. And I think for us, it was what we planned for quarter four as we have seen that initial launch at the middle of October through to quarter 4. So we're very happy with that. I think also another point, Maria, is that we're always trying to balance demand with having in-stocks. And you know with many competitors out there, they're not able to deliver on in-stocks, and that's a foundation of everything that Lovesac does and that we will never let go of. So managing that in-stock to service ratio with demand has always been key. I don't know, Donna, anything else that you want to comment in terms of the overall contribution for Q4?

Not specifically for Q4, and I won't give stats for the year. And I know, Maria, you like the numbers. But we were really pleased with the attachment rate as we ended fiscal 2022, and we expect it to be as strong going into fiscal 2023. So again, very pleased [technical difficulty] StealthTech overall.

Yes. And I think, Maria, you asked about margins as well. That's in line with our overall margins. So that is continuing to perform. So contribution rates, everything is strong. So yes, we're very excited. But as Shawn said before, it's in the early stage of adoption, and we will continue to put a lot of emphasis around driving awareness. But also, honestly, demos in the showrooms because what we've seen to be proven is that once consumers see and hear our product, they love it. They think it's remarkable. So we feel very good about the forward momentum.

Our next question comes from Brian Nagel with Oppenheimer. Please proceed with your question.

First off, I too would like to add my congratulations on another nice quarter. Congrats. So the question I have, my first question, just with regard to - I know you spent a time in the prepared comments talking about the supply chain and the issues you continue to deal with. But I guess the question I have is we look at the gross margin performance in the fourth quarter, tracked significantly better than I think most estimates out there, significantly better than the guidance you provided, and really not that far off of kind of like what I would say, historical highs. And then the initial, I guess, not guide is necessarily framework for Q1 would suggest more pressures here going - in the current quarter. So the question is this - and maybe I'll go back to kind of the puts and takes. And is there any reason why that from a gross margin sourcing perspective, shipping, whatever, it should be more challenging here in Q1 than it was in Q4?

Brian, it's Donna. So really, as I outlined in my script, the rates are where we thought they would come in. So they're as high as where we thought they would come in. The thing, it's based on volume as well because as the freight comes in, it sits in our inventory and we amortize it out off the P&L. But the other contributing factor going into Q1 is outbound freight, right? The outbound freight costs for us to last mile to the customer is seeing some significant impacts as well, more than what we thought last year, but what - 100% covered in all of our models. So not only are we seeing the inbound freight from overseas at accelerated costs, we're starting to see the outbound freight build as well. But again, covered all of those - increased rates are covered in all the models that I - all the - I'll call guidance for Q1 and framework for the year. But that's why you see - specifically for Q1, it's the timing of the containers. We're getting a lot more containers coming in, in Q1, and then it's the outbound freight.

Okay. That's helpful, Donna. Then my second question, I guess, a little bit bigger picture, but Shawn, you talked about the continued initial success here about - of StealthTech and that product launch. On the heels of that, I know we've talked, discussed this in the past, but any update as to how we should be thinking about additional products, newer products in Lovesac, either timing or maybe even idea of what these could be?

Yes. As we've said, we'll continue to put out new products at a trickle constantly. And what I mean by that is we're a platform-based business. Sactionals is a very powerful platform, been driving most of our sales. But the Sac platform continues to have opportunity to grow. We have a number of projects brewing in that realm. The Sactionals platform has all kinds of accessories and add-ons that will be meaningful, that will move the needle for us and continue to make that platform even more competitive than it has been. Heretofore, there are many people who have the style, the shape, whatever it is, doesn't work for their - for them esthetically or even comfort-wise. And we're making all kinds of innovations in that realm that we'll launch quarter-on-quarter over the next number of years. There's probably a decade less still of Sactionals innovation. And then StealthTech is our first toe into a completely new category, home audio, right? You look around your home. What are the categories that we could innovate in? I don't think people expected us to innovate into home audio. But we've done it, and I think that StealthTech is absolutely a newborn. I can't emphasize that enough. Like you will be asking it, and it's fair, I'll take the question any time and pontificate on all of our exciting new products to come, but recognize that like an invisible home theater system that's shrouded underneath foam and upholstery and then a removable cover, but tuned to be music to your ears with no sound quality loss at all because of our patented technology. That is a far-fetched crazy idea coming to you from a beanbag company, not one of the big names in the home audio. It's going to take years before StealthTech…

Our next question comes from Camilo Lyon with BTIG. Please proceed with your question.

Everyone, congrats also on a very strong close to the year. To that point, there's a lot that's changed from a macro perspective since the end of your fourth quarter. And I'm curious if you could give us some details on the health of the consumer. You clearly alluded to a very strong continued momentum in this first quarter sales framework you provided. But I'm just trying to parse out the components of that as it relates to price increases, expectations on StealthTech adding to that. Is that the doubling of the average ticket that you usually enjoy? And really trying to parse out the health of the consumer in a world where inflationary pressures are mounting, rates are rising and Russian invasion is creating some consternation around sentiment.

Camilo, great question. Thank you. So I think the first thing is, as we shared in our outlook, we feel very confident around demand and particularly also confident around our ability to supply to our customers in a matter of days. So I think that will continue, and we feel very strongly about that. And I think also then as you talk around disruptions, we're not yet seeing anything in terms of any dynamics that are really impacting demand or traffic into showrooms or on the web. We're really continuing to see great strength from our consumers as they buy into whether it be Sactionals or, as you said, around adopting early on StealthTech. So from that side, as we look at whether it be AOVs, we look at basket spend, we really continue to see great strength. So for that side, we feel with that disruptions that you mentioned, that we're so small in the category, and with everybody else unable to deliver, with so many delays and so many other things, that we truly are winning each and every day because of that formula of success. So obviously, we'll always be very mindful, continue to watch and adjust as we see anything. But today, we feel very good as we look forward into fiscal '23.

That's great to hear. And on...

Just to add to that.

Oh, sure, Jack. Sorry.

Oh, sorry. Sorry, Camilo, how are you doing? A couple of things. One is our target customer is, we think, a little bit more protected from some of the dynamics in the short run than the total population. And on top of that, I think something really important to add to Mary's points is that despite promoting significantly less last year, despite taking price increases, we've seen the value of the brand as determined by our own customers go up. And so they're valuing our brand more and more as they get to know it, and the disruption, I think, getting back to the whole conversion. That's why we're seeing the significant conversion. And that conversion is really important to talk about because we're disrupting by converting in the category while everybody else is trying to figure out how to play with the small hits or misses within the category growth, we're just plain disrupting. And that conversion rate is what's doing it for us.

Got it. That's excellent to hear. Thanks for that color, Jack. Donna, if I could ask you, when you think about the guidance, the margin guidance that you provided, the framework you provided, can you just tell us the expectations on freight costs? And if you're embedding a relief in those pressures this year or if you expect those to persist throughout the year at the current rate?

Yes. So consistent with what we said at the end of the third quarter when we had provided an outlook or a framework, we are still building the higher freight rates from a conservative standpoint as if they will persist throughout the remainder of this year. Also just remember, we maintain - because of our strong inventory position in evergreen inventory, we maintain a healthy in-stock position. So even if those were inbound or outbound freight costs started to drop, throughout the year, we would still have the inventory that would be impacted by the higher freight. So in any of the guidance or the outlook that we provided, we've assumed higher freight rates throughout the full fiscal year.

Our next question comes from Alex Fuhrman with Craig-Hallum Capital Group. Please proceed with your question.

Wanted to ask about your inventory. It looks like you have a pretty huge war chest to begin this year with. Can you tell us a little bit of what that consists of? Is it basically just your regular assortment, but just more of it? Curious just how you're managing your big inventory in anticipation of not knowing, I guess, what the supply chain could bring this year.

Yes. Alex, thank you for the question. I think as we look, we - I think I mentioned it earlier. In quarter 3, we made a big bet around continuing to build up our inventory levels, firstly, as we saw demand continue to be very strong, but secondly, also in the anticipation of the Chinese New Year impacts that obviously we're starting to see also. That was really put into our top-selling SKUs and continuing to drive out just on our core business on seats and sides. So you'll see, across the board, it's just a continuation of us are always trying to deliver within days to our consumers. I touched on earlier also the CSAT improvement. That's just really a reflection of how our customers are feeling. Every day is - Lovesac is able to deliver to them in such a short time when the rest of the industry is really struggling and continually delaying. So we feel really good. We were bullish because it's certainly going to help us go through. And the start of this year, we actually are at the best in-stock levels that we've ever been in. So congratulations to the team for anticipating that, and we will continue to always invest and manage forward so that we make sure that we always deliver to our customers.

I just want to add to that, too. There is a piece of that inventory, as I say, about the inbound freight that sits on the balance sheet. So there's an increase year-over-year of about $20 million. So when you look at that, in prepaid freight, that sits on the balance sheet as well. So it's our tangible inventory plus the freight that follows the inventory sitting on our balance sheet, which is what I talk about, will go through the P&L as that inventory is sold. So I just want to make sure that you're - you focus on there's a tangible piece of that inventory growth and then there's the freight associated with it.

Our next question comes from Matt Koranda with ROTH Capital. Please proceed with your question.

Congrats on a great quarter. Just wanted to attack the StealthTech question maybe from a different angle here. Can you provide any commentary on sort of the lift to average order values, either in the fourth quarter or full year '22 and how those benefited from StealthTech? And then just you mentioned in your commentary that customer demand on satellite sides was higher than expected. Should we be interpreting that as sort of customers are choosing larger systems than the base suggested configuration that you guys have put out there? And what are the implications for AOVs?

Yes. I'll start, and then I think Jack can also add on. And nice to hear from you, Matt. Thank you for the question. So obviously, from a StealthTech point of view, we're seeing AOVs for just the StealthTech alone of just over $3,000. And it's lifting our overall AOV by just over 700 basis points, so just over $207 per transaction. So we've been very pleased to see where that lift has come from. And to your point around the satellite side overselling to where we'd initially forecasted, which we feel great about, it is a little bit around the fact that we're seeing the larger configuration being purchased. So it's not just - as you go through kind of the 6- through to the 8- to the 10-seat side, we're actually seeing the larger configurations being bought into. So again, that gives us great confidence going forward that people really want to have a great experience with StealthTech. So from that side, we are in stock. We just want to build back the inventory on those satellite sides so that we deliver every day. And then, Jack, I don't know if there's anything else you want to add to that?

You've covered it at all. Thanks.

Great. Thank you, Matt.

Our next question comes from Lamont Williams with Stifel. Please proceed with your question.

Congrats. Just wanted to ask where you are in your hiring plans? And where you can expect investing in people for next year? And then secondly, on - just a quick follow-up on StealthTech. How is it the product working to bring in new customers? And are the initial sales going? So what's the breakdown between new and existing Sactional customers?

Great. Thank you, Lamont, for the question. So I think the first one you talked in terms of on hiring. I think from the first point, we feel good about the progress of hiring as we're entering into fiscal '23. We did make some adjustments in the field, whether it be around base pay, but we also rolled out our sales and service strategy, which includes a great incentive program. And I think coupled with the purpose-driven brand, we're seeing great hiring and really filling in the roles as well as honestly building the expansion that we have in touch points that Donna shared for fiscal '23. So feel good there. I think also in the head office, the hubs, we also see great abilities to hire talents, and we feel very good in terms of where that builds out. So today, we feel, from a fiscal '23, very strong there. I think then, in terms of your question around StealthTech, yes, we are seeing predominantly new consumers to Lovesac that are being attracted to us via StealthTech, which we're very excited about. But we're also seeing current consumers coming back and adding StealthTech to their Sactionals in their home. Because that's a wonderful thing that there's so much flexibility whether you bought a Sactional 12 years ago, you can add StealthTech. And that strength of the new technology to your current product is phenomenal. The StealthTech index for return customers is higher than anything we've seen before. So again, it just bodes very well for us as we continue to raise awareness and drive the demos that we feel very confident around the StealthTech performance through the year. But as Shawn said, it's at the early stage of adoption, and we will continue to really get people excited and get them to see, hear and feel it as they come to our showrooms or even just understanding about it on the web.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Shawn Nelson for any closing comments.

Yes. Thank you. Thank you to all the investors and supporters joining the call that continue to invest and support Lovesac. A huge thank you to our Lovesac team who are amazing and resilient, capable and who drive our business forward with lots of love. As we say at Lovesac, these results are their fault. Have a great day. Looking forward to another great year.

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