Yahoo Finance The Lovesac Company (NASDAQ:LOVE) Q1 2025 Earnings Call Transcript
The Lovesac Company (NASDAQ:LOVE) Q1 2025 Earnings Call Transcript June 13, 2024
The Lovesac Company beats earnings expectations. Reported EPS is $-0.83, expectations were $-0.99.
Operator: Greetings and welcome to the Lovesac First Quarter Fiscal 2025 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Caitlin Churchill with ICR. Please go ahead.
Caitlin Churchill: Thank you. Good morning, everyone. With me on the call is Shawn Nelson, Chief Executive Officer; Mary Fox, President and Chief Operating Officer; and Keith Siegner, 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.
Shawn Nelson: Thank you, Caitlin. Good morning, everyone, and thank you for joining us today. I'll start our discussion by reviewing highlights from our first quarter performance and sharing thoughts about our outlook. Then Mary Fox, our President and COO, will update you on the progress we are making on our key growth initiatives before passing the call to Keith Siegner, our CFO, who will review our financial results and outlook in more detail. Turning to the highlights of our fiscal first quarter. During our earnings conference call in April, we discussed a difficult first month of the first quarter and why we were confident that we generate better results going forward. Well, we're pleased that the adjustments we made to promotions and refinements in our approach with our new digital agency worked.
And we delivered net sales, adjusted EBITDA, net loss and EPS at or slightly favorable to the high end of our guidance ranges. Specifically for the first quarter, total net sales were $132.6 million, reflecting a year-over-year decline of 6% as we anniversaried a strong quarter last year and continue to contend with a challenging category backdrop. Total omnichannel comparable net sales declined 14.8% for the quarter. Though, as Keith will outline later, this was nearly all a result of the difficult first month before we made the adjustments I described earlier. First quarter adjusted EBITDA and net loss fell meaningfully versus the prior year first quarter. The decline in sales exacerbated the deleverage from opening 35 new touch points and investments in future sales driving initiatives, while we also saw increases in professional fees and marketing, some of which was nonrecurring.
Despite the full quarter results being below our recent trends, they still represented another quarter of market share gains in a category that was down double-digits. Additionally, at the midpoint of our newly issued guidance range for net sales in the fiscal second quarter, we'd be back to growth even against our 25th anniversary campaign last year. As we have outlined on the last several calls, the reason for our long-term consistent outperformance boils down to our focus on the customer. Our advantaged products and our unique omnichannel business model with an omnichannel infinity flywheel unlike any other. Our design for life philosophy permeates everything we do. We are a platform company as opposed to a product company or a merchant-led retailer.
Innovation is in our DNA, but always with reverse compatibility in mind, reinforcing our commitment to sustainability or sustain hyphen ability as we like to say, product platforms that can actually sustain. Our platforms are built to last and designed to evolve. That's the perfect segue into our latest product innovation. The sac that does it all now does even more. Welcome the PillowSac Accent Chair Frame. Sacs are the product that Lovesac was founded on 26 years ago and our namesake, the world's most comfortable seat. Sacs have firmly established their role in the family room, lounge, playroom, bedroom and many of the casual spaces in the home. We continue to be the leading brand in the subcategory that we established. What we've done with the introduction of the Accent Chair Frame is to elevate the PillowSac literally and figuratively.
Combined, the PillowSac Accent Chair is an eye-catching, inviting, sophisticated and stylish way to enjoy cloud-like comfort in your more formal spaces. In fact, Architectural Digest believes we turned this accent into the living rooms ultimate statement piece. We've seen tremendous response from both new and existing customers who are all finding ways to express their own personal style, sometimes purchasing numerous covers to fit different occasions. It's generating buzz, appreciation for our design for life approach and leading customers to ask us what's next. On that front, our product innovation pipeline remains very healthy. We have a few more launches coming this fiscal year that are on the smaller side of platform extensions. Following those, we have a larger launch in early fiscal '26 that we believe will open the aperture of potential customers and benefit AOV for a core platform of ours.
Following that, we have plenty more in the works including entirely new categories, but you'll have to wait for more details. We are also laying the foundations for services that support our commitment to circular operations and support the value proposition for customers to deepen their love for the Lovesac brand. Mary will give you more details, but resale and trading for our timeless and uniquely durable products are up first, so stay tuned. I'll close by touching on our outlook for the remainder of the year, which we reiterated today. As we discussed before, we are planning prudently. We're not counting on a macro balance to make our numbers. In fact, we're still basing our full year outlook off another down year for the category, down 10% compared to last year.
We're uniquely built as a business, primed to over-participate in a category rebound whenever it occurs in near real time. This will support top line growth and expanding profitability. But I want to be clear, we are not just waiting idly for the tide just lift our boat. We're expanding our physical accessibility through touch points. We're expanding our digital accessibility with new CRM tools and more. We're reinforcing tech foundations to ensure profitable scalability. We're innovating and adding products in existing and new categories. We're building a powerful brand, certainly, one that is unlike any other in our category, the opportunity is massive, and we're in a position of strength. Before I turn the call over to Mary, I want to thank the amazing Lovesac team for their role in delivering yet another strong outperformance versus the industry.
With that, I will hand it over to Mary to cover our strategic priorities and progress in more detail.
Mary Fox: Thank you, Shawn, and good morning, everyone. As Shawn discussed, we overdelivered to our net sales guidance for quarter one, which reflects a dramatic inflection in trends for March and April as compared to February and helps to put the quarter's tough start into context as what we believe is an anomaly. Importantly, on a five-year basis, our sales were up 224% from pre-pandemic level compared to the category of flat for the same time period, and our adjusted EBITDA margin has increased 365 basis points. In quarter one, we outperformed the category, underpinned by our customer and product-centric focus and our unique omnichannel infinity flywheel. We've built a business model and a platform unlike anyone else in the category, resulting in a total addressable market opportunity that is significant.
Brand health that is strong and growing best-in-class touch point economics and an advantaged supply chain. We're also pleased with our performance as we start the second quarter and we expect our growth to further benefit from disciplined investments in our strategic initiatives and capabilities that expand our addressable market. I'll now provide key highlights of our go-forward plans on each of our strategic initiatives. Firstly, product innovation. We were happy to launch the first of a number of great innovations this year, the PillowSac Accent Chair. You now have so many options with the PillowSac. You can lounge in a peapod, you can lay it flat and create a guest bed or place it in the new Accent Chair Frame for a stylist seat. In addition to selecting from over 150 machine-washable changeable covers, you can customize your Accent Chair with elegant hardware finishes and strap options.
Existing PillowSac owners can seamlessly integrate the Blonde Oak frame for added functionality, allowing them to experience their sac in a whole new way. While new customers are discovering just how sophisticated a sac can be. As we launched this great innovation, we leveraged our strong Architectural Digest partnership with an editor event last month in New York. Over 60 editors, content creators and interior design professionals were in attendance to celebrate the perfect bridge of style with cloud-like comfort. The initial response has been everything we hoped for and we look forward to sharing more in the upcoming quarter. Angled Side, which we also launched last summer continues to be a highlight for us. Notably, it continues to gain share, representing the largest mix of size within our sactional business and driving a higher average order value than sactionals without Angled Side.
We recently launched Angled Side in Costco, and it is already the number one star choice. Additionally, customers who select Angled Side report having an even higher satisfaction with comfort than our standard side customers. We're on track for our material innovation launch in early fiscal '26 that we expect to significantly open the aperture of where we compete in the couch category and enable us to accelerate our market share gains. We look forward to sharing more details with you closer to launch. Second is our omnichannel experience and we continue to strengthen our position as a true omnichannel retailer through a combination of our physical touch points and our digital platform. During the quarter, we opened 24 touch points and expanded our Best Buy partnership with 7 additional shop-in-shops.
In quarter one, we launched an enhanced post-purchase journey, My Hub, that further reduces the friction within the omnichannel customer experience. This has led to a significant increase in customers creating an account online, and these accounts provide us with a greater opportunity to engage the customer with personalized experiences and product recommendations, including new launches and more. Everything is designed to help us build long-term relationships. And in Phase 2 of My Hub plan this year, we are launching a seamless quote update and conversion capability for our customers that will deliver an enhanced customer experience, increasing the conversion and customer satisfaction. Importantly, as a result of our unique omnichannel experience, our customer satisfaction scores continue to improve and sequentially increased in quarter one, especially our digital experience and fulfillment scores.
These scores improved year-over-year to our highest levels recorded driven in particular by the strategic investments in resources and technology in our customer service capabilities, supply chain and our digital experience. Third is our ecosystem, which is centered around acquiring, delighting and maintaining relationships with loyal loving customers. And in February, we completed the onboarding of our new agency who will enhance this effort. Together, we leveraged our marketing mix using national advertising in traditional formats, including TV and established media, coupled with various digital strategies, leveraging social media, nonlinear TV and influencer advertising. Our digital marketing efforts focus heavily on driving conversion using localized and targeted tactics driving shoppers into a Lovesac touch point to experience our products in person.
This reinforces our commitment to a truly omnichannel business model, meeting customers where they choose to interact with us. Looking forward, we will continue to actively test in the media space to optimize our investments for growth especially considering opportunities in the space of video, search and audience targeting as well as broadening our brand awareness. In Q1, we successfully tested new targeting and promotional messaging for existing customers, including specific offers for the repurchase of covers. As we grow our customer base, we believe that speaking differently to this segment is a key driver of success and building lifetime value and loyalty and our efforts aided in the strong growth of existing customer repurchase in quarter one.
Lastly, on services within our ecosystem. We are focused on building these capabilities and further unlocking the right side of our flywheel and customer lifetime value. We're in the early phases of standing up the infrastructure to offer fully digitized resale and trading capabilities later this year, all further extending the life of each Lovesac product and continuing to deliver on our promise to create products that are designed for life and supported by circular operations. Now making disciplined infrastructure investments and driving efficiencies. In quarter one fiscal '25, we delivered material gross margin improvement through COGS and inbound freight reductions. We also continue to make infrastructure investments both in capabilities and technology that we're already realizing the benefits from.
We delivered a 9% reduction in total inventory at the end of the quarter, driven by the benefits of recent investments, including the new order management system. At the beginning of this year, we enhanced our inbound logistics strategy moving from a freight forwarder model to a direct carrier relationship, minimizing our reliance on spot rates. This benefits us both in better overall pricing and availability as well as deemphasizing the spot market pricing inflation and this represents significant cost avoidance. We're also making strong advancements in our outbound logistics model and we've successfully introduced new local parcel providers in one key market, which is delivering lower costs than our national partner and importantly, improved customer satisfaction.
We'll continue to expand this program throughout this year and beyond. So in summary, we are pleased with the progress on our strategic priorities and the strength of our performance that continued into the second quarter as we continue to successfully expand the business and make important foundational investments to drive as well as support the substantial growth that lies ahead. I will now pass the call over to Keith.
Keith Siegner: Thanks, Mary. Let's jump right on into a quick review of first quarter, followed by our outlook for the rest of fiscal '25. Net sales decreased $8.6 million or 6.1% to $132.6 million in the first quarter of fiscal '25 compared to the prior year period. This is slightly above our expectations, reflecting a successful adjustment to our promotional strategy and ironing out of inefficiencies following our agency transition both of which heavily impacted the first month of fiscal first quarter. Despite that difficult first month, we were pleased to once again deliver market share gains even against a still uncertain macro backdrop. Showroom net sales decreased $2 million or 2.3% to $81.6 million in the first quarter of fiscal 2025 compared to the prior year period driven by a decrease of 14.8% in omnichannel comparable net sales, partially offset by the net addition of 35 new showrooms compared to the prior year period.
For more perspective on intra-quarter trends, omnichannel comparable net sales were down only low single-digits for the aggregated second and third periods of the fiscal first quarter. Performance of our new showrooms continue to be strong and operational efficiencies from construction to opening enabled some earlier-than-planned openings. Internet net sales decreased $3.6 million or 9% to $36.6 million in the first quarter of fiscal 2025 compared to the prior year period. Other net sales, which include pop-up shop, shop-in-shop and open-box inventory transactions decreased $3 million or 17.1% to $14.4 million in the first quarter of fiscal '25 compared to the prior year period, primarily due to lower productivity of our temporary online pop-up shops on costco.com.
As a reminder, we may engage in limited open-box inventory transactions with Icon going forward to ensure our warehouses are operating as efficiently as possible. We believe the fiscal 2024 quarterly run rate is reflective of a potential baseline level to use in your models. By product category in the first quarter, our sactional net sales decreased 5%. Sacs net sales decreased 17% and our other net sales, which includes decorative pillows, blankets and accessories decreased 23% over the prior year. Gross margin increased 430 basis points to 54.3% of net sales in the first quarter of fiscal '25 versus 50.0% in the prior year period, primarily driven by a decrease of 790 basis points in inbound transportation costs, partially offset by an increase of 240 basis points in outbound transportation and warehousing costs as well as a decrease of 120 basis points in product margin, driven by higher promotional discounting.
SG&A expense as a percent of net sales was 51.6% in the first quarter of fiscal '25 versus 40.0% in the prior year period. The increased percentage is primarily related to lower net sales as well as investments in payroll, professional fees, rent, infrastructure, selling-related expenses and equity-based compensation. In dollars, overhead expenses increased $6.3 million, consisting mainly of increases of $4.5 million in professional fees and $1.2 million in infrastructure investments into the business to support current and future growth as well as $0.5 million in equity-based compensation. Employment costs increased by $4 million, primarily driven by an increase in new hires in fiscal '25. Rent increased by $1 million related to a $1.4 million increase in rent expense from our net addition of 35 showrooms, partially offset by a $0.4 million reduction in percentage rent.
Selling-related expenses increased $0.6 million, principally due to credit card fees related to an increase in credit card rates. We estimate nonrecurring incremental fees associated with the restatement of prior period financials was approximately $2.3 million in the first quarter. These are very difficult to forecast that we will continue to highlight any if applicable each quarter. Advertising and marketing expenses increased $1.1 million or 6.4% to $18 million for the first quarter of fiscal '25 compared to the prior year period. Advertising and marketing expenses were 13.6% of net sales in the first quarter as compared to 12.0% of net sales in the prior year period with the increased percentage primarily a result of lower net sales as well as some timing of expenditures arising as part of our agency transition.
Operating loss for the quarter was $17.9 million compared to operating loss of $5.7 million in the first quarter of last year, driven by the factors we just discussed. Before we turn our attention to net loss, net loss per common share and adjusted EBITDA, please refer to the terminology and reconciliation between each of our adjusted metrics and the most directly comparable GAAP measurements in our earnings release issued earlier this morning. Net loss for the quarter was $13 million or negative $0.83 per common share compared to a net loss of $4.1 million or negative $0.27 per common share in the prior year period. During the first quarter of fiscal '25, we recorded an income tax benefit of $4.2 million as compared to $1.3 million in the prior year period.
Adjusted EBITDA for the quarter was a loss of $10.3 million as compared to adjusted EBITDA loss of $2.1 million in the prior year period. Turning to our balance sheet. We ended the first quarter with a very healthy balance sheet, inclusive of $72.4 million in cash and cash equivalents as well as $34 million of availability on our revolving line of credit with no borrowings. Our total merchandise inventory levels are in line with our projections. We feel exceptionally good about both the quality and quantity of our inventory and our ability to maintain industry-leading in-stock positions and delivery times. Please refer to our earnings press release for other details on our first quarter financial performance. So now our outlook. Much remains the same as when we spoke in April.
We aim to grow irrespective of the category in the near term, continuing our track record of market share gains. Plus, we're primed to capitalize on the category rebound as soon as it happens and in more real time than our peers. As this occurs, the additional revenues should drive expanding flow-through of top line growth to bottom line growth. Specifically, we've not changed our baseline assumption for a 10% full year category decline which underpins our fiscal '25 outlook. The full fiscal first quarter category decline was about 12%, roughly consistent with our original assumption which also expected modestly better category conditions in the second half versus the first half. Again, should the category perform better, we would expect to perform better as well or vice versa.
For the full year fiscal '25, we are reaffirming our guidance. We estimate net sales of $700 million to $770 million. We expect adjusted EBITDA between $46 million and $60 million. This includes gross margins of 57% to 59%, advertising and marketing of approximately 13% as a percent of net sales and SG&A of approximately 39% as a percent of net sales. We estimate net income to be between $18 million and $27 million. We estimate diluted income per common share in the range of $1.06 to $1.59 and approximately 17.0 million estimated diluted weighted average shares outstanding. As a reminder, fiscal '25 will contain 52 weeks versus fiscal '24, which contained an additional 53rd week in the fourth quarter. For the fiscal second quarter, we estimate net sales of $152 million to $160 million, representing slight growth at the midpoint, a significant improvement from the fiscal first quarter.
We expect adjusted EBITDA loss between $2 million and $5 million. This includes gross margins of approximately 58%, advertising and marketing of 14% to 15% as a percent of net sales and SG&A of 45% to 47% as a percent of net sales. We estimate net loss to be between $6 million and $8 million. We estimate basic loss per common share is expected to be $0.53 to $0.37 with 15.6 million weighted average shares outstanding. In summary, stabilization of the category and an eventual return to category growth are ahead of us. In the meantime, we're balancing prudence and efficiency and expenses with our belief that it's essential to stay focused on the big picture. That's the massive long-term opportunity for tremendous value creation for all Lovesac stakeholders.
We are building the Lovesac brand and investing in new product innovation that spans style, function and new categories. The PillowSac Accent Chair is but one example. Try it. I think you'll love it. I'll now turn the call back to the operator to start our Q&A session.
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