Sunrise Resources Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2023

There are 9 speakers on the call.

Operator

Good morning, and welcome to the Lovesac's Second Quarter Fiscal 20 24 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms.

Operator

Rachel Shakhtar of ICR. Please go ahead.

Speaker 1

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 Signer, 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.

Speaker 1

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 filing 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.

Speaker 1

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 Now, I'd like to turn the call over to Sean Nelson, Chief Executive Officer of The Lovesac Company.

Speaker 2

Thank you, Rachel. Good morning, everyone, and thank you for joining us today. I'll start this call off by reviewing the highlights of our Q2 fiscal 2024, briefly providing an update on our operational accomplishments and finishing up with our outlook. Then Mary Fox, Our President and COO will update you on the progress we made against our strategic initiatives. And finally, Keith Signer, Our new CFO will review our financial results and a few other items related to our outlook in more detail.

Speaker 2

Before diving in, I want to thank everybody for their patience as we work through our financial restatement. We hold ourselves to very high standards of integrity, Accuracy and reliability of our financial statements is paramount. As of today, all amended filings are complete. Additionally, We're enhancing teams and implementing procedures and disciplines as we work to build a world class organization able to support growth for years to come. Moving on to our results.

Speaker 2

We're pleased with our 2nd quarter performance with top and bottom line exceeding our initial outlook provided in June. The economic environment remained challenging as macro pressures drove a more cautious consumer, in turn, keeping pressure on the home category. While we also felt pressure, Lovesac operated from a position of strength, leveraging our 25th anniversary campaign and omni channel expansion To continue our track record of outperforming the category and achieving positive net sales growth, Not to be overlooked, we delivered growth by a difficult comparison, lapping top line growth of 45% in the Q2 of fiscal 2023. Specifically, total net sales were 154,500,000 up 4% versus the prior year period, supported by total comparable sales growth of 7.2% for the quarter. On a 2 year basis, net sales grew an impressive 51%.

Speaker 2

Adjusted EBITDA was $5,300,000 as compared to $12,300,000 in the prior year period. As expected, gross margin expansion was more than offset by important investments in growth. Deleverage in marketing and advertising resulted from our 25th anniversary celebrity campaign and the launch and support of our angled side innovation, both of which will benefit us in the coming quarters. We also continue to make necessary and disciplined infrastructure investments to ensure we have the foundations For category beating profitable growth for the long term, the pressure from the investments will abate later this year as we'll talk more about that in a few minutes. Operationally, we made good progress on our initiatives To strengthen our Infinity flywheel that supports our differentiated business model, Mary will discuss in detail the progress on specific growth strategies, But let me provide a brief update.

Speaker 2

On the product innovation front, as previously discussed, we formally launched angled side in the quarter. Angled side offers benefits to augment both aesthetics and comfort, importantly addressing the number one style gap we identified in our research. By opening the aperture of potential customers, we're reaching more new and existing customers and seeing meaningful contribution every week Since the launch of the angled side, we continue to wisely expand our physical footprint, supporting awareness and benefiting our e commerce sales, Altogether delivering a seamless omnichannel experience to our customer. We're driving marketing efficiency with new tactics, including hyper local marketing to drive traffic. Lastly, we are still carefully investing in technology and R and D to fuel continued innovation to further elevate the entire customer experience and to ensure that we have a strong foundation to support the long runway of growth ahead.

Speaker 2

Looking to the second half of the year, we expect the macro environment to remain challenging, continuing to pressure the home category. We are not planning for any meaningful recovery in category growth this fiscal year. In terms of the promotional environment, We expect it will be more competitive as we head into holiday season and anticipate more frequency and depth of discounting across the industry. We've adapted our own plans accordingly and will remain very agile through the holiday season. Even taking this into account, which doesn't change our confidence that Lovesac will continue to outperform the category and yes, generate stronger growth in the second half than the first half.

Speaker 2

This is clear in our guidance where we estimate 3rd quarter revenues of approximately $154,000,000 and are Tightening the range of our fiscal 2024 net sales guidance to $710,000,000 to $730,000,000 Given the macro backdrop, we're highly cautious operationally. We're focused on efficiency and we'll control expenses very tightly. This will become more clear as we lap necessary foundational investments that began in the second half of fiscal twenty twenty three and which put peak pressure on bottom line growth in 2nd and third quarters this year. After adding in some discrete expenses, primarily professional fees related to the restatement of approximately 4,000,000 We now anticipate fiscal 2024 net income in the range of $20,000,000 to 29,000,000 In summary, we have an unwavering commitment to the customer, delivering our unique Designed for Life platform through circular operations and an omni channel experience. We're pleased with our performance thus far in fiscal 2024.

Speaker 2

Growing net sales and comping positively in a declining category while funding As we navigate the current environment and build on our track record of market share gains, which will become more evident in the coming quarters. We're confident in the future and we believe that we are well positioned to deliver on our outlook for the remainder of this fiscal year and capitalize On any opportunities the macro backdrop offers. I want to extend my gratitude and appreciation to our Lovesac team. It is their execution that enables our best in category financial and operational performance and drives my confidence and excitement in our future. With that, I'll hand it over to Mary to cover our strategic priorities and progress in more detail.

Speaker 2

Mary?

Speaker 3

Thank you, Sean, and good morning, everyone. We're pleased to have extended our track record of industry leading growth for quarter 2 and also quarter 3 as you can see from our preliminary results. Our 2nd quarter net sales growth of 4% continues to be significantly ahead of the category And more importantly, is up 2 21% on a 4 year basis to give a comparison to pre pandemic levels. And even with the planned SG and A deleverage that Sean mentioned, adjusted EBITDA margin has increased over 1,000 basis points over the same 4 year time period. It is our unique and compelling Design for Life platform and the virtually unparalleled value proposition it by a team that is coalesced around the priorities that support our growth strategy.

Speaker 3

We continue to drive operational excellence across the business and make progress as illustrated by the highlights I will now share with you. Firstly, starting with product innovation. As previously announced, our highly anticipated new product introduction, the angled side soft launched in May in conjunction with our 25th anniversary brand campaign. Our customers have been very receptive. As we've discussed before, STAHL was the number one reason customers left our purchase funnel And the angle side addressed our biggest opportunity around this barrier to purchase.

Speaker 3

But the benefit is not only aesthetic. We've also received strong feedback on enhanced comfort from existing and new customers. During Q3, we expanded distribution And the angled side has now been available across our showroom base as well as our e com platform since the end of July. A full media campaign launched during the summer in support and helped drive angled side as a percentage of total sides sold to over 40% in recent periods. We believe we will continue to gain market share through this new product introduction as awareness and appreciation continues to grow.

Speaker 3

Secondly, our omni channel experience. We continue is a true omnichannel retailer through a combination of our physical touch points and digital platform. During Q2, we opened 18 showrooms and 3 Best Buy shop in shops. Our success in driving strong efficiencies in the time from construction to opening enabled us to pull forward some openings with 15 of the 18 showrooms opening ahead of our original schedule. With regards to our Costco partnership, sales were up 15% in Q2, driven by increased pop up shop presence versus last year.

Speaker 3

Our e commerce channel performance continued to impress, up 12.8% for last year, including costco.comandbestbuy.com and contributing meaningfully to our category outperformance. Underlying all channels and proof that our plan is working, our customer satisfaction scores continue to improve and increase sequentially, driven by surgical initiatives in enhancing the digital experience and customer service improvements with technology investments in our customer love team. Thirdly, our brand ecosystem. Our efficient marketing, including our strong customer lifetime value to customer acquisition cost ratio, lies at the center of our ecosystem and serves as an effective driver of brand awareness and customer acquisition. To that end, we are being very selective about marketing where the traffic is and where the iBills are.

Speaker 3

As we continue to widen our customer aperture with both product innovation and marketing strategy and tactics. We continue to deploy new marketing tactics, including continuing to invest in high ROI performing programs and growing hyper local marketing to drive relevant traffic to our touch points. We remain focused on customer acquisition and have been utilizing vehicles such as direct mail campaigns that deliver Strong ROIs for us. As previously mentioned, we've also begun leveraging prime and linear TV buys to continue to drive reach And strengthen our brand love. The objective of our launch of Angleside was to broaden our aesthetic appeal to address the segment of the market that we were missing with our So we partnered with Architectural Digest, a leader in style to launch the product.

Speaker 3

The launch partnership included content and advertisements on architecturaldigest.com and their partners as well as the launch event in New York City with designers and influencers, which generated additional content driving awareness of the launch. To date, we are over 750,000,000 from this launch partnership and really pleased with not only the reach, but also the quality of the coverage. Regarding our Circular Operations initiative, we have made good progress on our open box inventory as we focus on improving Fitness and brand experience, and we are seeing over 20% improvement in returns back to stock versus last year as one key measure for this initiative. And then lastly, disciplined infrastructure investments and efficiencies. For fiscal 2024, we are investing in the areas of technology and research and development to best fuel our Infinity Flywheel.

Speaker 3

We are focused on continuing to enhance customer satisfaction through continued delivery of orders in just days. In addition, we believe our recent investments in supply chain will help drive inventory product improvements of 20%. We're pleased with the team's progress so far and are on track to deliver this by year end. As we've said before, we expect these initiatives will Drive a significant improvement in efficiency of working capital as well as associated cost reductions across inbound freight and warehousing, which we started realizing in quarter 3 and will continue to realize in quarter 4. Our AI pilots that we mentioned last quarter provides generative AI guided experiences to our customer facing service associates to improve customer service, and we're pleased with initial results, so it is still very early.

Speaker 3

We continue to believe this has the potential to enhance the overall customer And we are already seeing the benefits in the specific customer service satisfaction score improvement. As part of our people infrastructure investments, we recently appointed Carly Khawaja as our new Chief People Officer as we continue to build our capabilities and evolve the organization strategically so that we can effectively scale the business. Through leveraging our extensive human resources experience, we will be very strategic, building our organization through an optimal balance of We are laser focused on operational excellence as we manage our cost structure and capital allocation. As Sean mentioned, this will become more evident In summary, we're pleased with our year to date performance and are ready to deliver the all important 4th quarter. We're very proud of our team and their continued execution against our strategic initiatives, which in turn further strengthens This positioning empowers our Infinity flywheel.

Speaker 3

I will now pass the call over to Keith to review our quarter 2 results and our outlook for quarter 3 and the balance of the year. Keith?

Speaker 4

Thank you, Mary. Before I get started, I want to express how excited I am to be here today as part of this amazing team that this remarkable brand is truly differentiated business model. After having spent 16 years covering consumer companies on Wall Street, then being part of the leadership at a large cap consumer company and a startup, I can say the outlook for profitable growth at Lovesac is truly special. Between continued growth and market share gains for Sactionals and Sacs, Introduction of new products and categories and eventual geographic expansion, the opportunity is immense. All right.

Speaker 4

On to a quick review of the 2nd quarter followed by our outlook for the rest of fiscal 2024. Net sales increased $6,000,000 or 4 percent The $154,500,000 in the Q2 of fiscal 2024 with the year over year increase driven by web and showrooms. This was in line with what we projected for the quarter, driven by our July 4 promotional campaign and 25th anniversary celebration. Showroom net sales increased $5,800,000 or 6.3 percent to $98,200,000 in the Q2 of fiscal 2024 as compared to $92,400,000 in the prior year period. The increase in showroom sales was driven by an increase of 2.7% Incomparable showroom sales related to higher point of sale transactions with lower promotional discounting than the prior year and the net addition of 49 net new showrooms compared to the prior year period.

Speaker 4

As a reminder, Point of sale transactions that we reflect in our comparable sales metrics 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. Internet net sales increased $5,900,000 or 16.6 percent to $41,400,000 in the Q2 of fiscal 2024. This compared to $35,500,000 in the prior year period. Other net sales, which include pop up shop, Shop in shop and open box inventory transactions decreased $5,700,000 or 27.7 percent The $14,900,000 in the Q2 of fiscal 2024. The decrease was principally due to a lower open box inventory transactions, Only $2,800,000 compared to $9,500,000 in the Q2 fiscal 2023.

Speaker 4

As a reminder, our Open Box inventory transactions with ICON are a part of our circular operations, design for life and ESG initiatives. We're making great progress in reviewing all options for this returned product that align with our sustainability goal and which should retain more profits for Lovesac at the same time. We expect some of these initiatives to ramp in Q4. In the meantime, we may engage in limited open box inventory transactions with ICON to ensure our warehouses are operating as efficiently as possible. In fact, in the Q3, we will have an incremental $2,500,000 in open box sales, which are included in our outlook.

Speaker 4

By product category, in the Q2, our Sactionals net sales increased 3%, SAC net sales increased 18% And our other net sales, which includes decorative pillows, blankets and accessories increased 12% over the prior year. Gross margin increased 650 basis points to 59.8 percent of net sales in the 2nd quarter versus 53.3% in the prior year quarter, primarily driven by a decrease of 7 20 basis points In total distribution and related tariff expenses, this was offset partially by 70 basis points of pressure from higher promotional discounting. The decrease in total distribution and related tariff expenses over the prior year is principally related to the positive impact of 8 80 basis points decrease in inbound transportation costs, partially offset by 160 basis points and higher outbound transportation and warehousing costs. As a reminder, the benefits of the decrease in inbound freight rates We'll continue in the Q3, albeit at a slightly lower level. SG and A expense as a percent of net sales increased by 8 40 basis points, primarily due to deleverage within employment costs, selling related expenses tied to The Lovesac credit card and continued investments to support current and future growth as well as professional fees.

Speaker 4

In dollars, Employment costs increased by $5,700,000 primarily driven by an increase in new hires in fiscal 2023. Overhead expenses increased $6,200,000 consisting mainly of increases of $3,000,000 in professional fees and $3,200,000 in infrastructure investments and other miscellaneous items. Rent increased by $900,000 related to $1,900,000 rent expense from our net addition of 49 showrooms, partially offset by 1,000,000 Reduction in percentage rent. We estimate non recurring incremental fees associated with the restatement of prior period financials approximately $1,700,000 in the 2nd quarter. Advertising and marketing expenses increased $7,400,000 or 39 percent to $26,500,000 for the Q2 of fiscal 2024 compared to $19,100,000 in the prior year period.

Speaker 4

Advertising and marketing expenses were 17.2 percent of net sales in the 2nd quarter as compared to 12.9 percent of net sales the prior year period. The primary contributor to the increased percentage was the launch of the 25th anniversary campaign. This will serve as the foundation for many of our marketing messages through the remainder of the fiscal year. Operating loss for the quarter was $1,000,000 compared to operating income of $8,100,000 in the Q2 of last year, driven by the factors we just discussed. Before we turn our attention to net loss, net loss 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 this morning.

Speaker 4

Net loss for the quarter was $600,000 or negative $0.04 per diluted share compared to net income of $5,800,000 or $0.37 per diluted share in the prior year period. During the Q2 of fiscal 2024, we recorded an income tax benefit of $7,000 as compared to a $2,300,000 tax provision for the Q2 of fiscal 2023. The change in provision is primarily driven by the net loss for the quarter. Adjusted EBITDA for the quarter was an income of $5,300,000 as compared to adjusted EBITDA of $12,300,000 in the prior year period. Adjusted EBITDA for the 2nd quarter was ahead of our expectations, principally driven by the upside to gross margin.

Speaker 4

Turning to our balance sheet. Our total merchandise inventory levels are in line with our projections and have leveled out as we discussed in our prior call. This is despite the addition of angled sized SKUs and we believe this is a clear highlight of the uniqueness of our business model. 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. We ended the 2nd quarter with a very healthy balance sheet, inclusive of $54,700,000 in cash and cash equivalents, as well as $36,000,000 in availability on our revolving line of credit with no borrowings.

Speaker 4

Please refer to our earnings press release for other details on our Q2 financial performance. So now our outlook. Let's start with the fiscal Q3. We estimate net sales of $154,000,000 This includes approximately $2,500,000 of open box inventory sales compared to $4,200,000 in the Q3 of fiscal 2023. We expect adjusted EBITDA between positive $500,000 and negative $1,500,000 This includes gross margins Between 56% 57%, merchandising and advertising slightly above 14 as a percent of net sales and SG and A slightly above 44 as a percent of net sales.

Speaker 4

We estimate net loss to be $3,200,000 to $5,200,000 This includes approximately 1,000,000 of non recurring incremental expenses associated with our restatement of prior period financial statements. We estimate diluted loss per common share is expected to be $0.20 to $0.33 with 15,500,000 weighted average shares outstanding. Now for the full year fiscal 2024. We are tightening the range of our full year outlook for net sales to $710,000,000 to 730,000,000 We expect adjusted EBITDA between $51,000,000 $63,000,000 This includes gross margins of 57 At 57.5, merchandising and advertising of slightly above 13 as a percent of net sales and SG and A between $37,000,000 $38,000,000 as a percentage of net sales. We estimate net income to be between 20 and $29,000,000 These fiscal 2024 estimates include approximately 4,000,000 of non recurring incremental expenses associated with our restatement of prior period financial statement.

Speaker 4

We estimate diluted income per common share in the range of $1.21 to 1 $0.75 on approximately 16,500,000 estimated diluted weighted average shares outstanding. As a reminder, The 53rd week in the 4th quarter is expected to contribute approximately $6,000,000 in net sales. Quickly on our cash balance outlook. Given the timing of new touch point openings and our planned flow of inbound inventory ahead of the seasonally strong 4th quarter, The Q3 tends to be our lowest quarter ending cash balance of the year. I'm pleased to share that we ended fiscal 3rd quarter with approximately $37,000,000 in cash, which is up substantially from $3,800,000 at the end of Q3 fiscal 2023.

Speaker 4

As we monetize inventory through the busy season, we continue to estimate we will end fiscal 2024 with a higher net cash balance than we ended fiscal 2023. So in conclusion, we are pleased with our 2nd quarter results. Market share gains, strengthening foundations, exciting new growth drivers and a healthy balance sheet put Luvsac in an enviable position. I'm new here, but I'm already very proud of the team's execution and what continues to be a challenging macro backdrop, as well as their exuberance for optimizing the opportunity ahead of us. With a strong focus on growth underpinned by an ROI based

Operator

Our first question is from Thomas Forte with D. A. Davidson. Please go ahead.

Speaker 5

Great. So congrats on the performance and welcome Keith. I have one high level question. I wanted to give you an opportunity to address the question, I guess, with investors a lot. You have a great business with a high gross margin, Yet historically, you have not generated a lot of free cash flow.

Speaker 5

What have been the limiting factors in the past for this? How might this change in the future? When you get to a point where you're generating significant free cash flow, how do you intend to use it, including reinvesting in the business, Buybacks, strategic M and A. Thanks.

Speaker 2

Yes. Thanks for the question, Tom. Appreciate where it's coming from. This is Sean. WebSack has been on a rapid growth curve for about a decade now.

Speaker 2

I think when we look at our CAGR, going back many, many years, it's extremely high. Heading into the pandemic brought unprecedented growth And we've just been focused on chasing that, taking market share and building the business in the most Profitable way that we know how. Now that we've achieved the scale that we're at today, I believe that Even in real time, the evidence of free cash flow growing and And producing the kind of results that you're I think investors would hope for and expect out of a business that the cheapest kind of scale will be evident. And we're really excited about that. Obviously, here we're reporting on Q2, which is long past because of the restatement process, But we've given a flash on Q3 and while we haven't spoken specifically about cash, we feel really encouraged About those results and believe that the evidence of this business's ability to generate Free cash flow will be obvious.

Speaker 2

And so, looking forward to sharing more on that. I'll kick it to Keith who can probably Give a little more insight.

Speaker 4

Thanks, Sean. So this is a topic that's near and dear to my heart. And I think Listening to each of the 3 of us, both Sean, Mary and myself, I think you would have heard a very clear commitment To a disciplined approach to reinvestment, both in the organization and in future growth drivers. But just to put a couple of numbers around this in terms of Your proof in the pudding you could say. Look, SG and A deleverage as an example was a little over 840 basis points in the second quarter.

Speaker 4

When you build into your model the G and A ranges that I gave you for the Q3 and for the full year, what you'll see is that deleverage in SG and A in Q3, let's call it approximately half of what we had in 2Q. And then when you see what falls out for Q4, it's a substantial reduction even from there. So this isn't a fiscal 'twenty five only commitment. You're going to start to see this flow through in the next couple of quarters.

Speaker 5

Thank you.

Operator

Thank you. Our next question is from the line of Maria Ribbs with Canaccord Genuity. Please go ahead.

Speaker 6

Great. Good morning and thanks for taking my questions. First, I just wanted to ask about your outlook For Q4, which implies a pretty wide range for revenue growth for your biggest quarter, can you maybe just talk about what's implied in your assumptions Both at the lower and upper end of your guidance? And then I have a quick follow-up.

Speaker 4

Sure. Thanks. I'll start with a couple of numbers around this and then if Sean or Mary want to add in some high level. It's basically A $20,000,000 range on a big quarter given a macro backdrop that remains a little uncertain as you're hearing from pretty much everybody in the consumer category, particularly in our including in our close in categories. The way we're thinking about approaching that range is to plan prudently And allocate expenses prudently.

Speaker 4

We have a really unique business model that lets us react to upside prices and demand much more quickly than others, given that we're not merchandising led and can fulfill orders and refill So we think it's a better approach. We're going to know a lot more when we speak in a month Post the all important Black Friday holiday, but I think what we're trying to do is to show you we're going to manage this more prudently. The moving pieces really for us right now are, in general, macro conditions and macro demand within Category number 1. Number 2 is the promotional environment and you heard both Sean and Mary talk about this How promotional is the category? We are approaching this from the perspective of slightly more promotional than we have been in the recent quarters, but still less promotional than we were pre pandemic and less promotional than the peers.

Speaker 4

It's working for us. We're taking market share. We're expanding gross margins. We think that's the right way to approach this. And hopefully that gives you a little bit of color about that range for 4th quarter.

Speaker 4

And I know Sean or Mary if you want to add anything else.

Speaker 5

Sean?

Speaker 2

Yes. I think it's an uncertain time in the economy. We're being very prudent, as Keith said, and We're really happy that we have a business that is so dynamic and that has taken so much market share and it's so competitive in our landscape. And we're waiting to see like I think the rest of the world how it all unfolds on the consumer side. But from What we're seeing so far, this is the best guidance that we can give, both looking at kind of the upside of it and the downside of it.

Speaker 2

And we're being really thoughtful. We're trying to build a business here that's Here for 50 years, we're trying to at least, we're trying to build a business that is a legacy brand that has staying power. We're not interested in short term outcomes only. At the same time, we've been focused on building Profitable business that's been able to straddle very, very high growth, while generating profits And as you'll see free cash flow, so looking forward to 4th quarter and we'll hope for a little upside as well.

Speaker 6

Got it. Got it. That makes And then secondly, sort of understanding that you're not providing guidance beyond Q4 and but just sort of how should investors think about Key growth drivers next year, so maybe showroom expansion, shop in shop strategy, product roadmap. And then Keith, you sort of touched on this a little bit, but Maybe talk about where across your P and L you see the ability to be more efficient and maybe preserve margins if the environment continues to be challenging next year?

Speaker 4

Thank you for the question. And I'm going to ask everybody for a little bit of grace and patience given that this is my a little bit. We'll have a lot more to talk about with fiscal 2025 here with fiscal Q3 results in about a month. But the way we kind of think about this is the moving pieces for market share gains really remain the same. It is Intelligent and measured showroom and touchpoint expansion.

Speaker 4

And it's going to you're going to see it across all of The same, avenues that we've been doing, right? So you're going to see more Best Buy shop in shops. You're going to see more through our other partner channels. You're going to see more Formal showrooms. You're going to see more volumes through the website as well, Right.

Speaker 4

We have a phenomenal customer experience in our configurator that's working for us and I think we'll continue to pay dividends. So all of that's going to remain the same. We'll have new product introductions that come throughout the year, that are going to continue to drive interest in And love from our customers that will benefit the sales. When we move into costs, like we've said Ad nauseam throughout this call, we are going to be disciplined. It's not just on the SG and A side of things.

Speaker 4

It's also on the marketing side of things. We are seeing a lot of benefits from the 25th anniversary marketing campaign that we've discussed, but we won't have that same level of So I think what you'll hear from us is more of the same, which is working, Right. It is profitable growth, market share and better conversion To the bottom line and cash flows than we've seen in the past. So more to come on that, but it really is more of the same.

Speaker 6

Got it. That's very helpful. Appreciate the color.

Operator

Thank you. Our next question is from Alex Fuhrman with Craig Hallum Capital Group. Please go ahead.

Speaker 7

Hey guys, thanks for taking my question. Good to talk to you. Since we've last heard from you guys in June, a lot of other retailers are talking about Demand for big ticket items, furniture in particular, it looks like obviously you guys are keeping revenue guidance This year intact at the midpoint, but are you seeing your customers acting any differently over the past few quarters, maybe opting for cheaper covers Or fewer pieces? And just from a high level, how do you plan to market to customers this holiday season who might be a little bit more cautious They're spending and they were last year during the holidays.

Speaker 3

Yes. Hey, Alex, it's Mary. Thank you so much for your question. So I think to your point as we think about the health of the consumer and the category, I think we're not planning or seeing any material change in the category will remain challenging. We'll continue to outperform the category, take market share.

Speaker 3

And if you just think about even our outlook in We shared for quarter 3 double digit growth on top of obviously very strong growth last year with a category that's declining double digit. We're seeing a little bit around the obviously, Keith mentioned about promotions a little bit stronger In the category, we're seeing, for example, a little bit more around frequency, but we have baked that into our plans, and we feel really good as we look out for the rest of the holiday. We've been asked before in terms of any trends around Trade down, in fact, actually, we're seeing it to be relatively flat or slightly elevated around premium mix upgrades, Think about Lovesoft, think about storage seats. Still it continued to be a little bit around financing trends versus last year, And we expect that to continue, which again we have baked in. So I think for us, It's very much similar to what Keith was saying for next year.

Speaker 3

We'll see it kind of continuing. We hope for more upside as things start And we've been the category leader for profitable growth. We talk about this every quarter Before COVID, through COVID, through even this year, whether there's headwinds or tailwinds to the category in the economy, We just continue to perform and driving that market share gain all based on the Infinity Flywheel that we've talked about. So we'll be agile. We'll continue to adjust.

Speaker 3

As Sean talked about, we're being very thoughtful in terms of prudently managing expenses, but we will drive in every way to gain that profitable market share.

Speaker 7

Great. That's really helpful. Thank you very much, Mary.

Speaker 3

Thank you, Alex.

Operator

Thank you. Our next question is from Matt Koranda with ROTH Capital Partners. Please go ahead.

Speaker 8

Yes, good morning. Just a couple from me. So, I wondered if you could maybe, Mary, speak to the angled side traction And that you've had in recent months since the launch and then Stealth Tech attach rates, just curious what it looks like in this environment, just given consumers overall pressured, If you're seeing that change in any material way.

Speaker 3

Yes, great. Nice to hear from you, Matt. So yes, Angleside, as you know, super excited with the launch. You heard me talk about that a little bit earlier, seeing very meaningful contribution and our customers and teams love it. We shared before style was the number one reason that customers were leaving the purchase funnel.

Speaker 3

This was the number one silhouette that was So ranked for style and launch to date, we're really feeling good in terms of that great innovation. And I think it's not just in terms of the style choice. What's been really great is hearing from customers about the comfort level So we're seeing high adoption already, which I shared just over 40 So I feel really good in terms of the silhouette and just really reflecting our ability to widen the aperture, gain new consumers and even the Architectural Digest campaign. And they are known as being the number one style leader in furniture was just a tremendous way for us to be able to widen that Visibility. Then in terms of Stealth Tech, thank you for that question as well.

Speaker 3

Customers continue to love it, Matt, and I think you made a note of it in one of your Reports being in some of the showrooms, I was out in showrooms even on Wednesday. They love the product experience and they love the fact It's backwards compatible, which we see as a very unique proposition in the market compared to others that kind of want you to buy something and then a year, 2 years later, they'd With a new model and you have to buy that new model. So as we continue to drive the strong combination of home technology And really that opportunity and that white space that we will own and drive for many years to come, We're feeling really good. So yes, Stealth Protect certainly for the holidays, we feel really good. So thank you for the questions.

Speaker 8

Okay, great. Mary, thank you for that. And then on gross margins, just curious, I know you mentioned a more promotional environment. Obviously, we're seeing show up everywhere. But how much of a headwind are you guys factoring in on gross margins from promotions in the second half?

Speaker 8

Wonder if maybe Keith could speak to that. And then just in terms of financing, any discernible change in the way that your customers attach To the financing offering that you have, and have those costs I assume those costs have gone up for you guys, but just maybe speak to access to financing Among your consumer set.

Speaker 4

Sure. Thanks. And I'm going to do it in reverse order. I'm going to start with the financing piece. So look, it really is a differentiator for us to have this product, the Lovesac credit card.

Speaker 4

We work really closely with our partner on this. And It's definitely an important part of the proposition for us. So from a percentage or contribution to demand perspective, up a decent amount year over year. In fact, it's up to over a third of the dollars of demand in the fiscal second quarter, over 500 basis Increase in percentage. The piece that is also impacting our financials right now It is the increase in costs given the higher rates.

Speaker 4

So we think we still have a very competitive cost with our partner, But it is up year over year. That is one of the primary drivers of the year over year growth and the deleverage that we're seeing within SG and A. And you heard us outline those you heard me outline that earlier. But what we're doing in response to that is we're testing what really makes difference, right? What is the customer value and what drives behavior with the Lovesac credit card?

Speaker 4

Is it the duration given that we've seen other people Shortening duration of their offers, where do we get the best customer impact for the best cost for us, Right. And so we've been running a bunch of tests in different markets to optimize that. We feel like we're in a pretty healthy spot, particularly here as we head into The all important Q4. So generally speaking, I think It is working. It's accomplishing exactly what we wanted to, and we continue to fine tune and optimize that balance between driving sales at optimal cost On the other side of the equation on the discount side, we are playing around with the discounts, As you heard us mention, we do anticipate those discounts to pick up a little bit As we get into well, Q3 was slightly higher than it was in the Q2, and we expect slightly higher in 4th quarter Then in Q3, but these yes, we're talking in 100 basis points here, 100 basis points there.

Speaker 4

These aren't big numbers, Big changes in terms of what it's going to do to our net sales off of MSRP. Again, we've done a lot of AB Testing and let the data drive this. So when you see the gross margins that I provided earlier, you can back into Q4 pretty easily, right, because Q3 is virtually done. It's a negligible impact on the overall P and L from MSRP to net sales. So, hopefully that provides a little bit of color.

Speaker 8

Yes, absolutely. Very helpful, Keith. Thank you. And then just last one, if I could sneak one more in. On the showroom growth plans Heading into 2025, obviously not asking for guidance here.

Speaker 8

But I'm assuming those plans need to be pretty well baked at this Point in the year just given lease timing and everything like that. Just wondering how nimble you feel like you can be on showroom openings heading into If the environment changes for the better or for the worse, just curious how to think about nimbleness there and plans for next year roughly?

Speaker 3

Yes. Hi, Matt. So yes, thank you for the question. We continue to look at our real estate strategy all the time. And I think one of the success factors we've always had is around that nimbleness, picking up amazing locations Or even slowing down openings.

Speaker 3

So it will be similar to this year is kind of where we're But obviously, we'll share more as the year finalizes because we're still working on some of the leases for next I think what's super important as we think about the productivity of the showrooms, if I think about just this year in the new Fleet for this year, they're performing above last year. Our numbers are Super strong in terms of payback in just under a year. So it's a very strong model that we have and that's Growth on the year before, and we're planning for that to continue to grow for next year. So I think we unlike many others, we have Very small showrooms that are mighty. They drive incredible revenue off a very small space And really also help us with what we see as our superpower, which is that demo and really being able to showcase why Lovesac is just So different to anyone else because it is designed for life and gives you that flexibility.

Speaker 3

So again, we'll share more at the end of the year, But you can expect very similar to where we have been and we will continue to obviously watch the macros.

Speaker 4

Just two quick numbers for you as well. We had we're projecting or we had, I should say, 9 showroom openings in the 3rd quarter. We've got 2 in the 1st period of Q4. We did have one closure in Q3. Most of these are the closures Our relocate.

Speaker 4

So it's funny for me having come from where I was in consumer in the past where it feels like 90% of all the opens happened in the last month of the year. We're actually well ahead of it here. And the same thing goes for next year. Stay ahead of it, be thoughtful, The objective in measuring the fact that we are omnichannel and we use them as much as awareness drivers Really creates a very exciting opportunity for me as well. So Disciplined approach to 2025, as Mary said, and those are some extra numbers for the rest of this year as well.

Speaker 2

Yes, I'll tag on to this, if that's okay as well. Lovesac's showrooms are just a different animal In retail, they really are. And we feel really lucky to have evolved this way And to have frankly achieved this scale at this time, I think It's obvious to anyone watching that we've lived through some really unprecedented economic times. And over the last few years, it's been an Extremely noisy consumer marketplace. There's plenty of Lovesac sort of copycats out there trying to do Something like what we do mostly online.

Speaker 2

And in the end, when you see those products In person compared to what we're offering, it's just not even close in terms of quality and execution, that sort of thing. But you need to see it in person to really appreciate it because in a photograph, it can look very similar. And so to be, let's call it 200 locations ahead of pretty much everyone in that realm. And at a time when Investment is more dear, cash is more precious. We will be very cognizant of Building cash and building earnings as well I think most.

Speaker 2

I really think that puts us in a Really strong position over the next couple of years as our business model continues to gain strength. Look at the growth we're putting up compared to the categories. It's just The category is down significantly right now. I'm talking really abysmal Falling off going on, I'm being really transparent. Lovesac is growing and we will continue to grow And we feel very confident in that.

Speaker 2

And a big piece of that is that we've got the best product in the marketplace delivered in the most efficient way. And meanwhile, we don't have big eyes to just put up locations. I've said for a long time, our overall point of view is to have as few Chevron, we can get away with, but we need to make the product available to people who are spending 3, 5, $7,000 $10,000 $15,000 a whack with us. I would love to see this thing one time because even though they know they can return the product In our return window, whatever. And we'll always we're just so customer focused.

Speaker 2

We'll always take it back. We'll always work with people. And our return rate is relatively low, but who wants to deal with that, right? Consumers aren't stupid. And so these showrooms are a superpower.

Speaker 2

And the fact they can operate in like 800 ish square feet With a total staff of 5, 6 people, let alone usually 1 or 2, maybe At any given moment in the showroom, there is nothing comparable to what we're doing. There is no analog for that. They are radically efficient, they're radically effective and we're really proud of the business model that we have evolved into over these many years. And I think at this It's especially poignant because we have reached that escape velocity where others have not. And then meanwhile, the traditional players are just a completely different operating model.

Speaker 2

Those that we and I don't disrespect There are amazing furniture brands out there doing beautiful things. But we're not operating on beauty. Our product is beautiful and we have great designs and only getting more refined with introductions like the angled side, etcetera. And there's more to come, lots more to come. But we're playing a different game and it's working really well for us.

Speaker 2

And I think that all of these strengths are the reason you're seeing this disparity between us and the category and you will continue to see it and so we're very proud of that.

Operator

Thank you. As there are no further questions, I would now hand the conference over to Sean Nelson for closing comments.

Speaker 2

Yes. Just want to say thank you to all of our investors and partners and all those in the finance community who continue to support our business. Especially thanks to our extended Lovesac family and the teams that continue to drive our results. Have a great day.

Operator

Thank you. The conference of Lovesac has now concluded. Thank you for your participation. You may now disconnect your lines.

Powered by Quartr
Earnings Conference Call
Sunrise Resources Q2 2024
00:00 / 00:00