Lovesac Q2 2026 Earnings Report

Lovesac EPS Results

• Actual EPS: -$0.45
• Consensus EPS: -$0.72
• Beat/Miss: Beat by +$0.27
• One Year Ago EPS: -$0.38

Lovesac Revenue Results

• Actual Revenue: $160.53 million
• Expected Revenue: $160.42 million
• Beat/Miss: Beat by +$106.00 thousand
• YoY Revenue Growth: +2.50%

Lovesac Announcement Details

• Quarter: Q2 2026
• Date: 9/11/2025
• Time: Before Market Opens
• Conference Call Date: Thursday, September 11, 2025
• Conference Call Time: 8:30AM ET

Lovesac (NASDAQ:LOVE), trading on NASDAQ under the symbol LOVE, is an American furniture company known for its modular seating systems and distinctive foam-filled “Sacs.” Founded in 1995 by Shawn Nelson, the company has built a reputation for innovative design that emphasizes comfort, durability and adaptability. Its core offerings include Sactionals—customizable sectional sofas assembled from individual “Sactional” cubes—and the original Lovesac Sacs, large fabric-covered bean bag chairs available in a variety of sizes and materials.

In addition to seating solutions, Lovesac has expanded into home entertainment products with the introduction of the Stage, a modular soundbar system designed to integrate seamlessly with Sactionals. The company also offers a range of accessories such as slipcovers, ottomans and accent pieces that allow customers to personalize their living spaces. By combining proprietary performance fabrics, such as its stain‐resistant DuraSack covers, with high-resilience foam and patented frame technology, Lovesac positions itself at the intersection of comfort and modern functionality.

Originally based in Provo, Utah, Lovesac relocated its headquarters to Stamford, Connecticut, as part of a strategic effort to access broader markets and talent pools. The brand reaches customers through a mix of direct-to-consumer channels, which include branded showrooms across the United States and Canada, as well as an e-commerce platform that supports online ordering and design consultations. This omnichannel approach allows Lovesac to engage both local customers in its retail studios and a broader digital audience.

Shawn Nelson continues to lead the company as chairman and CEO, guiding Lovesac’s vision of sustainable growth and product innovation. Under his leadership, the company has emphasized design thinking, material science and customer experience, aiming to establish a distinctive niche within the home furnishings industry. Through ongoing product development and expansion of its retail footprint, Lovesac seeks to offer versatile living solutions that adapt to evolving consumer lifestyles.

Lovesac Q2 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: In Q2, Lovesac reported $160.5 million in net sales, up 2.5% year-over-year, winning market share despite an estimated 4% industry decline.
• Positive Sentiment: The new Snug by Lovesac line soft-launched in 27 showrooms and has expanded to 100 locations with a major marketing campaign featuring Britney Snow.
• Negative Sentiment: Full-year gross margin guidance was lowered to 57–58% due to increased tariffs and promotional discounting, with Q3 expected to see the largest margin impact.
• Positive Sentiment: Lovesac finished Q2 with a healthy balance sheet—$34.2 million in cash, $36 million of borrowing capacity, and plans to reduce inventory by FY 2026 end.
• Positive Sentiment: The company exited its Best Buy partnership ahead of schedule and under budget, decreasing SG&A expenses and allowing focus on core channels.

Presentation

[Operator]

Greetings and welcome to The Lovesac Company Second Quarter Fiscal 2026 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Caitlin Churchill, Investor Relations. Thank you. You may begin.

[Caitlin Churchill, Managing Director at ICR]

Thank you. Good morning, everyone. With me on the call is Shawn Nelson, Chief Executive Officer, Mary Fox, President, 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.

[Caitlin Churchill, Managing Director at ICR]

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. Reconciliation of the most directly comparable GAAP financial measure to such a non-GAAP financial measure has been provided as supplemental financial information in our press release. Now, I would like to turn the call over to Shawn Nelson, Chief Executive Officer of The Lovesac Company. Shawn?

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

Good morning, everyone, and thank you for joining us. I'll start today by sharing a high-level overview of our second quarter results, provide an update on our Design for Life product platforms, and touch on our views for the remainder of the year before passing the discussion over to Mary Fox, our President. Mary will discuss our tailored customer acquisition engines and key growth enablers. Finally, Keith Siegner, our CFO, will review our financial results and provide more detail on our Q3 and Fiscal 2026 outlook. Turning to our second quarter. Overall, we are pleased to have delivered results in line with, or slightly favorable to, our expectations across all metrics, representing another quarter of top-line growth driven by our secular growth initiatives across Design for Life product platforms and efficient customer acquisition engines. For the second quarter, total net sales were $160.5 million, reflecting a year-over-year increase of 2.5%.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

These results reflect market share gains despite the ongoing headwinds facing our category, which we estimate declined approximately 4% for the comparable period. Total omnichannel comparable net sales increased 0.9% for the quarter, with additional growth coming from new and non-comp touchpoint contributions. Our balance sheet remains very healthy, with inventory levels and net cash providing substantial flexibility to weather tariff distractions, accelerate growth, and enhance returns on capital. This is a very exciting time for The Lovesac Company. While the home category and high-ticket consumer goods in general have been under pressure for years now, with many in our industry waiting for an eventual recovery to the housing market and a normalized furniture replacement cycle, we've been both controlling expenses for efficiency and protecting significant investments in innovation to create meaningful long-term value for all stakeholders. We've done this while maintaining annual profitability and a very strong balance sheet.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

In our December 2024 Investor Day presentation, you may recall, we used the analogy of an oak tree to represent the brand that we are focused on building here at The Lovesac Company: wide, tall, strong, and durable. Currently, the outside world sees only a few of the branches of this tree, namely the Sactionals and the Sacs, along with a few accessories and ancillary products around the edges. We promised new branches over the next coming years, some representing entire new rooms of the home. It was then that we unveiled the first new platform launch, or brand new branch to this tree, a platform still in the living room, the EverCouch. The new EverCouch is in the midst of its debut, with new, fresh advertising support rolling out right now. Mary will speak to our observations and successes with EverCouch in more detail in just a few minutes.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

As we refined our strategic roadmap for this pivotal transition from a product-focused company to a true brand, it became clear that we needed to sharpen and focus our positioning through a brand evolution refresh for Lovesac. This brand evolution work has been going on over this past year in collaboration with a world-class branding and design firm. It has been fortuitous that our talented new CMO, Heidi Cooley, is fully onboarded now and able to spearhead this effort to its completion. This work has laid a clear and reliable foundation whereon we can build Lovesac into a multifaceted home brand with an organized and prioritized product hierarchy and merchandising strategy. This will not only allow us to confidently extend the brand further, but also deeper into the categories where we already have strength in order to compete even more vigorously for market share.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

To that point, we see many opportunities to rapidly harvest Lovesac brand equity, earning more revenue and margin dollars from existing markets and customers through incremental new product development and channel expansion. We believe this is our fastest and most credible path to more profitable and secular growth in the near term as we strengthen the core at Lovesac, even before we utilize this broader framework to compete in the new rooms in pursuit of the more radical growth opportunities that are still more than a year away. This brand evolution work and new product hierarchy has also led us to rethink everything from new product naming to some new products themselves and the channels through which some of these new and even existing products can and should be offered.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

More to come on that, yet we see significant new channel opportunities, particularly with some of the new products that we are close to announcing that are still in the living room space. Meanwhile, to better align with this new product and channel strategy, we have chosen to rename the EverCouch product line to be called Snug by Lovesac. The advertising went live this week with a fresh new look and feel, as you'll likely see on TV and digital platforms over the next few weeks. It suits the product better as the Snug product line, consisting of the Snug Sofa, the Snug Love Seat, and the Snug Chair, is everything that Lovesac has to offer. It's washable, upgradable, shippable, movable, snugly and comfortable, but in a bit smaller package that can always fit any space and look forever new.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

We're excited about its performance to date, and its rollout recently expanded to 100 of our physical locations already. We promise to share in more detail the results of our brand evolution work, our product roadmap and hierarchy, and channel strategy over the coming quarters as we bring incremental elements to life. Rest assured, while we are proud to have taken significant market share, even in these tough years for the category, remember we were recently ranked number 19 on the largest home furnishings retailer list by Furniture Today. Our ambition is to be much larger than that. We've made significant and fundamental investments in this brand and in new products that you are going to see unleashed in the marketplace starting now with the Snug product line and with more to come in subsequent quarters and years.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

Turning to the macro, we've seen a very slight improvement in the category, with overall furniture spend down 3.7% from May through July, with July being the best of the three months. It's too soon to count on July as a bend in the trend, since we've seen stronger months arise occasionally in the past year. As such, our baseline for planning purposes remains unchanged from our initial outlook, which is a full-year furniture category that is down mid-single digits. As for net sales, we remain focused on what we can control. Like I said earlier, we aim to leverage our secular growth initiatives to drive growth. We grew in the fiscal first and second quarters, and as Keith will detail later, we forecast growth for the full year, even without the category supporting us, within our original annual net sales guidance.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

As for profitability, these are very unusual times with the rules changing on us regularly, especially as it pertains to tariffs. Last quarter, we highlighted that, barring materially different scenarios, we felt we could cover the potential impact of tariffs, increased competitive discounting, and the Best Buy exit fees with our previous annual guidance. We have numerous tools available to us, given our unique model with high product margins, geographic redundancy, and strong vendor relationships. We've made solid progress on mitigation factors, including select price increases taken early in the fiscal third quarter. However, with incremental worsening in the tariff backdrop and continued pressure on competitive discounting, we have lowered our gross margin range, which has impacted the bottom line ranges accordingly.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

Importantly, we have identified additional measures that will benefit gross margins beginning later this year, as well as over the coming quarters, which we believe will support the high 50s, near 60% level we previously discussed over time. Keith will provide our updated guidance ranges in a few minutes. In short, we estimate Fiscal 2026 to be another solid year of market share gains, with absolute growth in a down category. Through selective pricing, tightly managed controllable expenses, and efficiencies in marketing spend, we believe we can expand bottom line profit margins and dollars to the midpoint of the range and end the year with a strong foundation for the future.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

In conclusion, we are committed to delivering on our objectives, leveraging Lovesac's innovative product offerings, strong consumer relationships, and operational excellence to grow irrespective of the category in the near term while maintaining clarity around long-term thinking and value creation. Our refreshed brand evolution work now unlocks the next phase of execution against our ambition of reaching our goal of 3 million Lovesac households by 2030 and building the most loved home brand in America. While we aren't sitting around waiting for it, we believe that when the replacement cycle for comfort seating ramps up and housing turnover reaccelerates, which is one day closer than it was yesterday, Lovesac will be ready to capitalize on it immediately. This added revenue growth should drive even more flow-through of top-line growth to bottom line growth and additional margin expansion beyond that that is supported by our secular initiatives.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

Finally, I want to thank our dedicated team members who work tirelessly to bring our innovations to market and deliver an exceptional customer experience. Every one of you is helping to reshape the home furnishings industry with products that are designed for life and thereby creating long-term value for all stakeholders. Before I hand it over to Mary, we'd ask everyone on this call for a moment of silence to remember the victims and survivors of the 9/11 attacks, the brave men and women who responded that day, and the families who continue to grieve. We'll do that now. Thank you. Mary?

[Mary Fox, President at The Lovesac Company]

Thank you, Shawn, and good morning, everyone. Building on Shawn's overview of our Design for Life platforms and our strong results for Q2, I'll now focus on our second superpower, our customer acquisition engines that are uniquely tailored to each of our Design for Life platforms, as well as our growth enablers that are fueling our momentum. As a reminder, what makes our customer acquisition engines so powerful, a superpower in effect, is our ability to leverage different mixes of brand and performance marketing, digital configuration through lovesac.com, incredible showroom experiences, and efficient partnerships to optimally affect my product platform. Done wisely, we can efficiently generate customer awareness, convert that awareness into customers, and ultimately build long-term relationships and brand love.

[Mary Fox, President at The Lovesac Company]

Starting with brand and performance marketing, Shawn shared some initial highlights of our brand evolution work and what's to come, and you'll see a lot more of this work cascade through marketing in coming quarters. That said, we are already beginning to optimize our marketing mix as we build awareness of our brand and excite our customers both with our core Design for Life platforms and our new innovations. In Q2, we leaned into mid-funnel tactics. Encouragingly, traffic and return on ad spend increased versus last year, driven by our refocus on CTV and YouTube, with plans to expand these partnerships in the second half of the year, as well as leveraging answer engine optimization with Google and Microsoft. Our social media and partnerships team did a stellar job in Q2, keeping Lovesac on the forefront of culture spanning all of our product lines.

[Mary Fox, President at The Lovesac Company]

We partnered with influencer and author Eli Rallo to host an on-trend book talk-themed event at Bibliotek in New York City. Key editors and influencers attended to experience the PillowSac Accent Chair Frame firsthand and listened to a special reading from Eli's upcoming book release, garnering over 227 million earned media impressions and 1.1 million social media impressions from 51 influencers. We also had two amazing partnerships in Q2. For the final week of the 2025 FIFA Club World Cup, Michelob Ultra and Lovesac popped up at the Pitchside Club in New York City. The Lovesac Lounge was the ultimate comfy spot to watch the matches, complete with Sactionals with StealthTech and custom Michelob Ultra soccer ball-themed Sacs and Squattomans. We then collaborated with Van Leeuwen, a Brooklyn-based ice cream brand, for their National Ice Cream Day campaign that celebrated the 10th anniversary of their best-selling flavor, Honeycomb.

[Mary Fox, President at The Lovesac Company]

We created three limited edition Van Leeuwen ice cream snack covers inspired by their fan-favorite flavors, including Honeycomb, Strawberry, and Sicilian Pistachio. This was a 360-degree partnership with PR, influencer events, organic social, email, SMS coverage, and website placement, and garnered over 40 million total earned impressions. Lovesac's unique positioning, combined with activation capabilities, allows us to move quickly at the speed of culture. In Q2, we jumped into viral trending topics such as Coldplay Cake, Love Island, and Labubu, which performed two times stronger than our benchmark. Before moving on to our digital configurations, let's spend a minute talking about our most recent innovation, Snug, a massive opportunity for us, which puts Lovesac squarely into the $14 billion couch category.

[Mary Fox, President at The Lovesac Company]

This new product line, which features not only stylishly adaptable couches but also love seat and chair options, was a soft launch in Q2 in 27 showrooms and on lovesac.com, with a learning agenda focused on our selling experience. Initial results from the soft launch look promising, and this will build, as we've already expanded the number of showrooms in Q2 to 100 and growing. However, beginning earlier this week and with full rebranding in place, we launched our formal marketing campaign. You'll see many of the brand and performance marketing elements we've already discussed coming to life. It all begins with an engaging campaign leveraging one of the hottest and culturally relevant celebrities, Britney Snow.

[Mary Fox, President at The Lovesac Company]

This is just the beginning of many new ways we plan to effectively build Lovesac into a multifaceted home brand that is trusted and loved by customers, all informed by the brand evolution work we're completing, and we look forward to sharing more in coming quarters. Second is our digital configurations and how we bring Lovesac to life online. As we launch new product lines, including Snug, we continue to invest in optimizing the digital experience. Through our research, we know that customers shop differently for sectionals versus couches and chairs, and our digital team undertook extensive testing of both the website and homepage design. As a result, we significantly improved the top navigation, implementing a more intuitive design based on furniture shopping behaviors and quicker product finding.

[Mary Fox, President at The Lovesac Company]

Since launch, customers are more engaged, and they're converting at a higher rate with improved bounce rates, all contributing to one of our highest recorded digital customer satisfaction scores in Q2. We also continue to advance our customer re-engagement center, My Hub, always with the goal of being a frictionless omnichannel experience for new and repeat purchases. In Q2, over 20% of EverCouch, now Snug, transactions were from existing customers, which further illuminates the opportunity for us to connect with our current customer base as we launch new products. Third is our showroom experience, the physical brand amplifiers of our Design for Life products and the linchpin of our omnichannel model.

[Mary Fox, President at The Lovesac Company]

In Q2, following on from the soft launch of Snug in 27 locations and lovesac.com, we continued our expansion of this product line to just over 100 locations at the end of Q2, with the plan to complete the balance of the chain in Q3. To support this exciting new program, our training and operations team, along with Shawn, conducted full-day hands-on training sessions across our key markets. Early results are encouraging, and we've seen customers adopting this new platform even ahead of our national launch campaign. In addition to the updates to performance-based compensation that we shared in Q1, we've advanced our efforts to provide performance visibility across the field in Q2 through the launch of improved performance dashboards. We're supporting our retail chain through improved visibility into sales and team performance, labor efficiency, and customer experience.

[Mary Fox, President at The Lovesac Company]

We've also launched a digital quote management tool, which not only supports increased quote conversion but also strengthens the omnichannel customer experience through the delivery of consistent quote follow-up and communication nationwide. Finally, complementing our showrooms is our partnership model. As we shared in Q1, we've continued to evolve our thinking to support our customer acquisition engines, which includes enhancing our focus on more profitable growth and improved customer experiences. This led us to end our Best Buy partnership, which we outlined last quarter. I'm pleased to share that we've successfully completed our Best Buy exit on September 2, ahead of plan and under budget. In regard to our Costco partnership in Q2, we piloted and scaled an enhanced Costco display model that elevates the Lovesac experience within a compact footprint.

[Mary Fox, President at The Lovesac Company]

Updates included the addition of StealthTech demonstration capabilities, supported by a new StealthTech video test in two key markets, which is planned to expand to new markets throughout the remainder of the year. The updated tower design optimizes the footprint, creating space for recliner demonstrations and the addition of the Stub Chair. These enhancements position us to flex our assortment and deliver enhanced customer experience throughout our Costco roadshow event. When combined, these four elements of our customer acquisition engines create an unmatched customer experience that drives brand love and enables long-term relationships, and we are reinforcing this even further with our customer-facing services. Since our Q1 launch of Loved by Lovesac in Texas, our new resale platform has rapidly expanded into five additional states, giving even more customers access to pre-loved products.

[Mary Fox, President at The Lovesac Company]

With additions like the PillowSac Accent Chair Frame and StealthTech combinations, we're not only expanding our range offering, we've laid the foundation to unlock trading capability for our customers. This will begin with a customer pilot later this year and will ensure a seamless experience before scaling next year. All of these actions strengthen our value proposition of Design for Life products that are built to last, designed to evolve, and ready to be loved again. Key to us sustaining this long-term profitable growth are our growth enablers, within our supply chain playing a pivotal role. As I shared before, our supply chain is purpose-built for scalability and designed to support new product and platform introductions.

[Mary Fox, President at The Lovesac Company]

Our team has done a terrific job both in transforming our supply chain and also delivering strong progress in mitigating the industry-wide exposure to tariff costs, as evidenced in the outlook that Keith will share shortly. To address tariff headwinds, we deployed a four-point mitigation plan back in April, and I'm pleased to report strong progress across all fronts. The first is focused on managing costs by working with our long-term vendors for concessions. We've received support from every key vendor, enabling us to reduce costs. Second is manufacturing diversification, including the work to further diversify manufacturing away from China with our long-term partners. We remain on track to be mid-teens for China for the full fiscal year, with an exit rate well below that. Third is strategic pricing, and as I shared before, we executed some informed price increases.

[Mary Fox, President at The Lovesac Company]

These increases were determined following a deep dive into our overarching competitive price positioning against numerous options in the consideration set for our customers. We feel very comfortable with where and how Lovesac is now positioned, appropriate for the quality, style, features, and benefits each of our products has to offer. Additionally, the work helped us better understand the elements of our value proposition, and we immediately developed and rolled out training and tools throughout the field organization, making it easier for all of our team members to convey to customers the specific value inherent in our Design for Life product platforms. The final initiative for us was cost efficiency, and we've achieved and continue to identify cost savings across the business. Lastly, I really want to recognize our team for their swift and strategic execution.

[Mary Fox, President at The Lovesac Company]

Thanks to their efforts, we believe that this four-point plan will mitigate the majority of the current tariff pressures. With that, I'll now hand over to Keith to share more on our financial performance and our outlook. Keith?

[Keith Siegner, EVP & CFO at The Lovesac Company]

Thanks, Mary. Let's jump right on into a quick review of the second quarter, followed by our outlook for the rest of the fiscal year. As we begin with performance metrics, please note that all references to the second quarter refer to Fiscal 2026 unless otherwise noted. Net sales increased $3.9 million, or 2.5%, to $160.5 million in the second quarter compared to the prior year period. Showroom net sales increased $10.3 million, or 10.4%, to $109.1 million in the second quarter compared to the prior year period, driven by an increase of 0.9% in omnichannel comparable net sales and the net addition of 16 new showrooms. Internet net sales decreased $1.8 million, or 4.1%, to $42.5 million in the second quarter compared to the prior year period.

[Keith Siegner, EVP & CFO at The Lovesac Company]

Other net sales, which include pop-up shop sales, shop-in-shop sales, open box inventory transactions, and the Loved by Lovesac program, decreased $4.5 million, or 33.6%, to $9.0 million in the second quarter compared to the prior year period. The decrease was primarily attributable to the company's decision not to engage in any BARTO transactions during the current period. By product category, in the second quarter, our Sactionals net sales increased 4.6%. Sac net sales decreased 22.5%, and our other net sales, which includes decorative pillows, blankets, and accessories, increased 2% over the prior year.

[Keith Siegner, EVP & CFO at The Lovesac Company]

Gross margin decreased 260 basis points to 56.4% of net sales in the second quarter of Fiscal 2026 versus 59.0% in the prior year period, primarily driven by increases of 110 basis points in inbound transportation costs, 50 basis points in outbound transportation and warehousing costs, and a decrease of 100 basis points in product margin driven by higher promotional discounting. SG&A expenses, as a percent of net sales, was 44.9% in the second quarter of Fiscal 2026 versus 47.0% in the prior year period. The decreased percentage is primarily related to lower professional fees, credit card fees, and other overhead costs, as well as higher net sales. The improved expense leverage compared to our prior guidance reflects tighter expense management, as well as lower Best Buy costs during the transition period and tied to the final exit of the relationship.

[Keith Siegner, EVP & CFO at The Lovesac Company]

During the quarter, we incurred approximately $1.9 million of total non-recurring expenses related to the exit of our relationship with Best Buy, inclusive of fixed asset impairment, closure, and payroll expenses. Despite this expense, we reported a decrease in selling, general, and administrative expense dollars. This was primarily related to decreases of $2.1 million in professional fees, $0.5 million in credit card fees, and $1.7 million in other overhead costs, partially offset by $1.5 million of impairment charges related to the Best Buy partnership termination and increases of $0.6 million in payroll, $0.5 million in equity-based compensation, and $0.1 million in rent. Rent increased by $0.1 million related to a $0.5 million increase in rent expense from our net addition of 16 showrooms, partially offset by a $0.4 million reduction in percentage rent.

[Keith Siegner, EVP & CFO at The Lovesac Company]

We estimate non-recurring incremental fees associated with the restatement of prior period financials were approximately $0.4 million in the second quarter. Advertising and marketing expenses increased $0.2 million, or 0.7%, to $23.5 million for the second quarter compared to the prior year period. Advertising and marketing expenses remained relatively flat at 14.6% of net sales in the second quarter, as compared to 14.9% of net sales in the prior year period. Operating loss for the quarter was $8.8 million compared to $8.4 million in the second 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 their most directly comparable GAAP measurement in our earnings release issued earlier this morning.

[Keith Siegner, EVP & CFO at The Lovesac Company]

Net loss for the quarter was $6.7 million, or negative $0.45 per common share, compared to a net loss of $5.9 million, or negative $0.38 per common share in the prior year period. During the quarter, we recorded an income tax benefit of $2.1 million as compared to $1.8 million in the prior year period. Adjusted EBITDA for the quarter was $0.8 million as compared to $1.5 million in the prior year period. Turning to our balance sheet, we ended the second quarter with a healthy balance sheet to provide substantial flexibility for Lovesac to invest in growth to enhance long-term value creation for shareholders. We reported $34.2 million in cash and cash equivalents while retaining $36 million in committed availability and no borrowings on our credit facility. First, our total merchandise inventory levels are in line with our expectations that we outlined last quarter.

[Keith Siegner, EVP & CFO at The Lovesac Company]

We began reducing excess core inventory levels in the second quarter, which helped offset the working capital required for building EverCouch, now Snug, weeks of stock. We feel very good about both the quality and quantity of our inventory and our ability to maintain industry-leading in-stock positions and delivery times, and believe we can end Fiscal 2026 with lower dollars of inventory than that held at the end of both the second quarter and at the end of Fiscal 2025. Second, nothing has changed in our strategy to allocate excess capital opportunistically with a focus on long-term value creation and enhancing returns on capital. Given significant uncertainty and macro backdrop owing to tariffs and consumer spending in the near term, we did not repurchase any of our common stock during the second quarter.

[Keith Siegner, EVP & CFO at The Lovesac Company]

Year to date, we've repurchased $6 million of our common stock outstanding, and we have approximately $14.1 million remaining under our existing share repurchase authorization. Please refer to our earnings press release for other details on our second quarter financial performance. For our outlook, as Shawn mentioned, we experienced modest but not overly material improvement in category trends in the fiscal second quarter, but nothing significant enough for us to alter our assumption in our plans for a 5% full-year category decline. While our new ranges imply improving net sales growth rates in the fiscal fourth quarter, we have many secular tailwinds helping counter the category outlook and providing optimism.

[Keith Siegner, EVP & CFO at The Lovesac Company]

These factors range from annualization of Fiscal 2025 major product launches, our recent launch of Snug with the marketing program having just launched this week, a broader reboot of our marketing strategies informed by our brand evolution work that Shawn just discussed, growth in physical showrooms, more compelling financing offers through the Lovesac credit card, and an easy comparison given missteps during the Cyber Five holiday period last year. For the full year Fiscal 2026, we are tightening our net sales guidance range to reflect 4% to 9% growth for the fiscal year. We are also favorably adjusting our forecast for controllable expenses within SG&A and for efficiencies in marketing. However, while we have made great progress managing the impacts of ever-changing tariffs and, to an extent, competitive discounting pressures, our guidance ranges assume some pressure from gross margins flow-through to adjusted EBITDA, net income, and EPS.

[Keith Siegner, EVP & CFO at The Lovesac Company]

These will be most pronounced in Q3. We have identified additional measures that we expect will benefit gross margins beginning in Q4 and supporting a path to achieve the high 50s, near 60% level we previously discussed over time. Specifically for the full year, we estimate net sales of $710 to $740 million. We expect adjusted EBITDA between $42 and $55 million. This includes gross margins of 57% to 58%, advertising and marketing of approximately 12% as a % of net sales, and SG&A of approximately 40% to 41% as a % of net sales. We estimate net income to be between $8 and $17 million. We estimate diluted income per common share in the range of $0.52 to $1.05 and approximately 16.3 million estimated diluted weighted average shares outstanding.

[Keith Siegner, EVP & CFO at The Lovesac Company]

For the third quarter, we estimate net sales of $151 to $161 million, representing mid-single-digit revenue growth at the midpoint and representative of our near-term plans for tariff mitigation. We expect adjusted EBITDA loss between $1 and $7 million. This includes gross margins of 56% to 57%, advertising and marketing of 14% as a % of net sales, and SG&A of 47% to 49% as a % of net sales. We estimate net loss to be between $8 and $12 million. We estimate basic loss per common share to be $0.51 to $0.83, with 14.7 million weighted average shares outstanding. In summary, stabilization of the category and an eventual return to category growth are ahead of us, even if that timing is unclear at the moment. In the meantime, we are balancing prudence and efficiency with our belief that it's essential to stay focused on the big picture.

[Keith Siegner, EVP & CFO at The Lovesac Company]

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 category to support a powerful multi-year secular growth outlook, with macro upside exposure as icing on the cake. With that, back to you, operator.

[Operator]

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Maria Ripps with Canaccord Genuity Corp. Please proceed with your question.

[Maria Ripps, MD & Senior Research Analyst at Canaccord Genuity Inc]

Great. Good morning, and thanks for taking my questions. First, as you undertake your brand evolution sort of refresh, do you anticipate any changes to the customer acquisition approach or maybe marketing effectiveness here in the near term?

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

Yeah, we have so much happening on the brand and marketing front that I think that's going to be a major theme, actually, for the next few quarters. We have, as you know, this brand refresh just coming to prime time. We have the Snug campaign that launched this week. We have a new CMO on board who's insanely talented and really excited to be taking those controls. I think that you're going to see a lot change in the way that we go to market at The Lovesac Company and the way we deliver our advertising and the way we communicate. I think you can already see it reflected in this campaign with Snug, which is really unique. We've got one of the hottest celebrities out there right now representing this product aligned with the brand. You'll be seeing Britney Snow on all the social channels.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

You'll be seeing a lot of really, not just exciting creative, but a new aesthetic to it. I guess the cool part is because of the timing of that particular launch, it really forced through a lot of the change in tone in the way that we go to market and spend our money to reach prime time faster, even with Heidi Cooley's more recent onboarding. It's all coming together great. Mary, I don't know what you might add on customer acquisition and our spend.

[Mary Fox, President at The Lovesac Company]

No, I think, you know, Maria, as Shawn said, you'll see it. Hopefully, you got to see the Snug by Lovesac campaign launched earlier this week. It's just so critical for us in terms of the campaign being around showing the couch category that anything they can do, we can do better. I think we're just getting a lot more confident and clear in our messaging around our value proposition and really how do we find the eyeballs that are considering a purchase in their home and how we get them to see us as the right choice and to be able to convert them. Meanwhile, we continue to just build the full funnel, as we always have. You see that in our results in terms of the success of continually gaining market share for everything. Every platform we have, we're just very targeted in how we approach it.

[Mary Fox, President at The Lovesac Company]

As Shawn talked about some of the work under Brand Evo, we've built out a very clear product hierarchy. We'll share more with you over time. It's just going to enable us to be a lot more targeted in terms of how do we maximize the potential for all of our products, whether it be in all of our showrooms or even, honestly, just getting a much greater level of velocity on our website. It's just been really good work to really help us be able to pull open the brand in this multifaceted strategy that we have for the home. We'll be delivering over, as Shawn said, the coming weeks with all the campaign and then months and years as we really are building this for the long term. Thank you for the question.

[Maria Ripps, MD & Senior Research Analyst at Canaccord Genuity Inc]

Got it. That's very helpful.

[Maria Ripps, MD & Senior Research Analyst at Canaccord Genuity Inc]

I wanted to ask about Snug by Lovesac and sort of now that the product is launched in more than 100 showrooms, can you maybe help us think about the type of partnerships or distribution partnerships that would be most complementary for this platform?

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

I think it's too early to speak to any specifics, but let's go to first principles. It's always where I like to start. You know, the reality of Sactionals is that it is a wildly, it is the simplest to wildly complex product platform you could imagine, right? Just buy a bunch of seats, buy a bunch of sides, build anything you want. It could be deep, it could be long, you could have deep pillows, and all of a sudden the platform, you know, has complexity that is really, of course, indicative of its Design for Life nature, right? This is the product you'd be with you the rest of your life. Snug is much simpler. You still get almost all of the Lovesac benefits you're used to, right? It's washable, it's somewhat changeable, but it doesn't require the intricate demo in-person experience that, for instance, Sactionals has.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

This product platform's ability, therefore, to appear perhaps in environments that aren't Lovesac owned and operated and staffed is apparent. It's really influenced our thinking about, you know, future products as well. You know, you could imagine future products more analogous to Sactionals that deliver an extremely high Design for Life ranking, but they require some hand-holding and some demonstration. You can imagine more products like Snug that represent the brand well, have the best quality, but don't require such intimate demonstration experiences. The first and most important channel for Snug is our website. You know, this is a beautiful sofa that sits amazingly well, has storage big enough to fit Britney Snow in it, as you'll see her climbing inside of it, actually, in some of the campaigns. It's pretty funny. That represents the brand well, but doesn't, you know, necessarily need as much demonstration and whatnot.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

I'm giving you a haphazard description of this product hierarchy that we are not haphazard about. We have now a much clearer picture of how we can deliver sales and, to that end, expand our channel strategy with these products that don't require in-person demos. That's the key to it. I'll just leave it at that because it's too soon to announce any partnerships, but we are excited about both online and offline opportunities with products that can represent the brand in this way.

[Maria Ripps, MD & Senior Research Analyst at Canaccord Genuity Inc]

Got it. That's very helpful. Thank you both.

[Operator]

Thank you. Our next question comes from the line of Michael Allen Baker with D.A. Davidson & Co. Please proceed with your question.

[Michael Baker, MD & Senior Research Analyst at D.A. Davidson]

Okay. Thanks. Can you talk about a little bit more detail on what has changed in terms of the EBITDA outlook versus a few months ago? You said tariffs, you said promotional activity. Is one of those bigger than the other? On tariffs, maybe, I don't know if you could help us with a little more specificity. I thought, you know, sort of tariffs were coming in lower than expected. At one point, you know, we're expecting over 100% in China. What on the tariffs is worse than expected and how much of the reduction in guidance is due to the promotional activity?

[Mary Fox, President at The Lovesac Company]

Hey, Mike. I'll take the tariff piece and then I'll turn back to Keith in terms of the EBITDA outlook. I think, you know, when we last reported back in June, you'll remember the reciprocal rates for many of the key countries that we source from, such as Vietnam, Malaysia, Indonesia, were actually sitting at 10%. More recently, they actually pretty much doubled with most of them at 20% or 19%. I think that has stepped up from when we last reported. That's built into the guidance that, you know, obviously Keith shared through. In the meantime, we just continue to work on moving more products out of China, which has the heaviest weight of tariffs. The team have done a good job on that. Some things are a little bit slower to move out, such as some of the technology and a few custom fabrics.

[Mary Fox, President at The Lovesac Company]

It's just put a bit more weighting for us. Keith, I'll turn to you for Mike's question on the EBITDA outlook.

[Keith Siegner, EVP & CFO at The Lovesac Company]

Yeah, thanks, Mary. Thanks, Mike. It really is a gross margin topic, Mike. As you're aware, as you could see through the other line items, I think we're doing a great job managing the controllable expenses, leveraging, and gaining efficiencies in marketing. Let's talk a little bit more about that gross margin, Keith. Also, as you look to the year-over-year deltas in the fourth quarter, we're closing that gap somewhere. We anticipate closing that gap somewhere. Let's talk about that for a second because the pressures are really twofold. It's sort of the perfect storm of the tariffs. To be frank, the requirement that we increase the promotional discounts that we're offering, given the competitive backdrop, the combination of those two things were more punitive to the model in the near term than we had expected last quarter when we gave you the guidance.

[Keith Siegner, EVP & CFO at The Lovesac Company]

Let's talk about the fourth quarter step up for a second there in terms of the year-over-year delta. It's important to note that the fourth quarter lapse for us from a gross margin perspective is easier than it was in either the second or third quarter. That's because last year's fourth quarter saw a meaningful step up in our effective discount level. We ramped promotions following that tough start to the holiday selling season. This is the largest single driver of the improved year-over-year delta in Q4 as it compares to Q2 and Q3. The other piece of this is partially tied also not only just to the change that Mary mentioned in the effective tariffs on a few of the countries, but it has to do with our exposure to China sourced goods. It's going to be lower.

[Keith Siegner, EVP & CFO at The Lovesac Company]

We anticipate it's going to be lower in Q4 than Q3 or Q2. That lessens the tariff burden on the P&L. The price increases we took in Q3 actually remain consistent. Here's two things that kind of happened. First, it's been harder to get custom and StealthTech manufacturing out of China than we originally anticipated. We've made great progress. We have good visibility into it now. It did take a little longer than we thought last quarter. The second piece of this is a little bit of what we anticipated from the China sourcing to hit in the 2Q moved into 3Q, which concentrates that effect. It's substantially higher as a percentage of net sales in Q3 than it is in Q4 or in Q2. You know, that was a little bit on the timing related to our prior guidance.

[Keith Siegner, EVP & CFO at The Lovesac Company]

These are very unusual and exogenous factors that we're dealing with here. As Shawn mentioned earlier, and as I mentioned as well, we've got quite a few plans in place to get us back to those, let's call it like long-term levels over time that we've discussed in the past.

[Michael Baker, MD & Senior Research Analyst at D.A. Davidson]

Thanks for that, caller. If I could ask one question of Shawn. Shawn, I think you had said, new, new, maybe, I don't know if you specifically called it the new room, but it sounded like a big new launch, new room potentially. You said at least a year away. That sounds like the end of calendar 2026. Is that, I thought it was going to be sort of earlier in 2026. Maybe I misinterpreted that. Is that new launch, new room, that you have teased, being pushed out at all?

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

No, I mean, it's a general comment about these big changes coming in the future. I will say the idea that it would come early in calendar 2026 is not realistic. I think that we do have actually a lot of action between here and the new room, if you can believe that. We have a lot of really exciting things to be announcing over the next few quarters. As we look at advancing into the next room, we've been very clear that that's coming. We will be entering that realm in a fulsome way that I think is going to be really exciting and pretty game-changing for the brand. It's not going to be a trickle. We still got a little bit of time between here and there. I think that's a decent breadcrumb.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

In the meantime, we also have a lot of really exciting products to launch in the living space that you're familiar with. It's a good call out.

[Michael Baker, MD & Senior Research Analyst at D.A. Davidson]

Got it. Okay. One more, if I could, any change, and I mean, I presume not, we haven't talked about it, but any change in that sort of long-term outlook that you guys talked about at your analyst day, which, again requires a pretty big ramp in terms of growth beyond 2025, sort of 2025, a little bit of an off year, and then growth in calendar 2026 and 2027, you know, and beyond a much, much greater ramp. Is that still the idea?

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

Yes, Mike, that's still the idea. Look, this year with all the tariff stuff has been a little bit of a wonky year relative to that plan. Obviously, there was no way to include that into that algorithm. We're managing through it. I think we've got good plans to get through it and then get back on track. There's always going to be a couple of little things like that. It's interesting when you're at the margin levels we are at, particularly at the bottom, little deltas and basis points can make a big, big difference at the bottom line EPS. That's the opportunity here too. We get through this tariff stuff, we get back on the algorithm, there's tremendous upside at the bottom line with very small changes in basis points and flow-through from the top line.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

Nothing fundamentally has changed on that, just a little bit of noise this year because of the distractions, but we still feel great about the long term.

[Michael Baker, MD & Senior Research Analyst at D.A. Davidson]

Right. Thank you for the caller.

[Operator]

Thank you. Our next question comes from the line of Eric Delore with Craig Hallum Capital Group. Please proceed with your question.

[Eric Des Lauriers, Senior Research Analyst at Craig-Hallum Capital Group LLC]

Great. Thank you for taking my questions. I appreciate the commentary you provided on the puts and takes on the EBITDA revision. That certainly sounds like it's mostly a gross margin issue here. Could you expand on the levers you have to pull on expanding gross margins, midway through Q4 and into next year? It sounds like you're pretty confident on your ability to do that and would love to just get some more color if you have it.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

Yeah, great question. Let's first step back for a minute and look at some historical context here because I think it's important for the overall conversation. For a number of years, The Lovesac Company reported gross margins in the low to mid-50% range. However, over the last couple of years, we completely rebuilt the inbound logistics program. We implemented automated systems. We found other efficiencies in operating procedures. In effect, we structurally reset gross margins to the high 50%, near 60% level. That's kind of what we were discussing in our investor day last year. While our latest full-year guidance for this year reflects a range of 57% to 58%, so still high in the historical context, it is below the high 50%, near 60% level. We have identified measures to get us back on that path, just like you talked about.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

Here are five I'll give you that we think can help. First, the outbound logistics opportunities still remain for us. We've made it through most of the inbound pieces, but now we can optimize warehousing. We can optimize last mile shipping. Tests for these things are in the works and they're underway. That's number one. Number two, we continue to work on realignment of our countries of origin to minimize tariff and other costs. That's a much bigger conversation we're happy to get into. We are not done with that effort. There are a lot of opportunities still to work there, some of which will take a couple of years to put in place, but that's a big part of this. We're actively pursuing those levers. Number three, we're going to implement new optional delivery service levels for payment.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

We also have new return policies and other things that can help us mitigate some of the gross margin pressures. Number four, as part of this brand evolution product hierarchy work that Shawn Nelson and Mary Fox have talked about, we're going to evolve our promotion strategy, moving away, as Mary said, from sort of a broad-based everything is included promotion and more toward a variable strategy across products and channels. This will be coming soon. I think what that will do is help us in reducing aggregate discount levels, which puts pressure on the gross margin and is a big part of that change in adjusted EBITDA that I talked about a little while ago for this year.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

The last, but definitely not the least piece of this, is hopefully when we come out of this category decline and get back to growth or normalization even, the competitive promotional environment settles in and takes some of the pressure off the big tentpole moment. All of these things, we've got good visibility into action plans that we're going to be putting into place. Hopefully that gives you some color.

[Eric Des Lauriers, Senior Research Analyst at Craig-Hallum Capital Group LLC]

Yeah, no, that was very clear and helpful here. One kind of follow-up here, you cited the product hierarchy just in that answer there. It's come up a couple of times previously in this call. Just to make sure I understand that here, is that sort of the differences between the Sactional and the Snug? For example, one is sort of a more complex, hands-on, requires a lot of demos. The other is more simple and perhaps easier to sell online kind of thing. Is that what you're referring to by product hierarchy, or are there other aspects of it that I might be missing?

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

That is a, I guess, front-end outcome of the product hierarchy. We haven't revealed and discussed like this overall product hierarchy that I'm kind of talking about, but it's a good representation of that kind of thinking, and it's been evolving in real time. We came up with the EverCouch invention and approach to building beautiful, super comfortable sofas, armchairs, love seats in a smaller package, a while back as we've cooked up the product and whatnot. As the brand's been evolving, we've been going to this brand Evo work with the outside agency. As all of this has kind of converged, which, you know, manifested itself, for instance, in the name change to Snug, which is a better name for that product line, and it fits within this product hierarchy I'm alluding to, you get that outcome.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

We'll have more to share, perhaps even next quarter, about this brand Evo work, what it implicates for the brand, the product hierarchy, et cetera. Again, you're going to see us already living with it in real time. As we launch Snug, you'll see this change in tone in the advertising and our approach to marketing in general. It's just a really, really exciting time for Lovesac. Frankly, I think it sets us up well further out for these bigger changes that are to come. In the meantime, as I said just a few minutes ago, given this new point of view on products for new channels, products for the intranet especially, that just don't require so much hand-holding, you're going to see a lot of action from Lovesac over the next number of quarters that we can be really excited about.

[Eric Des Lauriers, Senior Research Analyst at Craig-Hallum Capital Group LLC]

Great. I appreciate that color there, and we'll look forward to that. Last one for me here, just on the overall sort of marketing shift here, EverCouch to Snug. It sounds like there'll be some more overall Lovesac, fully brand-wide refreshments here. I'm just wondering how long this has been in the works. It seems like this switch from EverCouch to Snug is somewhat more recently. I'm wondering if there's any sort of increase in marketing expenses that you're expecting over the next quarters or years here to kind of support this. I guess just a bit more color overall on some of the timing around this brand refresh and the overall strategy behind it. Thanks.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

Yeah, nothing meaningful in terms of marketing expenses. In fact, we should become more efficient with our marketing. You'll see a lot of tactical changes, right? Like historically, you've seen Lovesac heavy on linear TV. It was a formula that worked really well for us. I think you'll see a pretty meaningful shift to digital. It'll be a shift in dollars spent and whatnot. Nothing, you know, we're not thinking about increases. We feel really good about our marketing spend levels. You can see us controlling our SG&A. The good news is that we've made this investment already. This brand refresh is now, you know, almost complete. We've been absorbing those kind of hard costs, you know, with the agencies and everything required to do this all along the way. This is something I'm super proud of at Lovesac.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

You know, as we've said a number of times, the past three years have been brutal to the home category. It's been a really tough time overall. I think Lovesac's weathered it well, not just hunkering down. We are controlling SG&A and whatnot. That's pretty obvious. We've been investing. This is just one of the many investments that we've made. You're going to see the fruits of those labors unfold in real time all the way, you know, through holiday season this year, well into next year. Like I said, a continued launch cadence of new products that you nailed it are really appropriate for online sales, especially, and, you know, new representation in the execution of those advertisements and everything else.

[Eric Des Lauriers, Senior Research Analyst at Craig-Hallum Capital Group LLC]

All right. I appreciate that color. It's all great to hear. Thanks for taking my questions.

[Operator]

Thank you. Our next question comes from the line of Thomas Ferris Forte with Maxim Group LLC. Please proceed with your question.

[Tom Forte, MD & Senior Consumer Internet Analyst at Maxim Group]

Great, Shawn, Mary, Keith, thanks for taking my questions. One question and one follow-up from me. Shawn, as you know, I cover Apple and I've had to think about the prospect of an iPhone made in the U.S. How should investors think about the potential for Lovesac made in the U.S.?

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

Yeah, for anyone following close enough, you know, this is a passion point for me. It has been for years. I'm sorry that we haven't delivered it sooner, but we have not stood still. The answer is we are running this down really hard for every obvious reason. Back to first principles. Look, this is a brand that promotes sameness in a way that no other brand does, in a way that's good for consumers, right? You buy into a Sactionals platform, even EverCouch, you'll be able to upgrade it, change it, even, I don't know, swap out the arms with the same fabric that you bought maybe four or five years ago that will still match because that's the way not only we build the product on a component basis, but we, you know, try not to drop our fabric so that you can do what I just described.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

That said, you're buying into a platform that, you know, demands us to maintain sameness. These same basic SKUs, the components that make up our Design for Life clever products, should be made closer to consumers, delivered over shorter distances, more sustainably, and more readily. That's exactly what we're chasing down on a first principles basis. We're closer to it than ever. Not ready to, you know, make any announcements yet, but I'm very confident that a significant portion of our manufacturing will be moving domestic over the next number of quarters even. Like any big shift that will require a lot of, you know, it'll require a folding in. It won't be overnight, but it's within our grasp. I think we have a better path to that than almost anyone in our business because of the component basis of how we approach these inventions.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

It really gives us a lot of economies of scale that others may not have. We're excited about those prospects.

[Tom Forte, MD & Senior Consumer Internet Analyst at Maxim Group]

Great. Thank you for that. For my follow-up, I was hoping to provide an update on your re-commerce efforts. It seems like that could be a great way for you to provide extra value to consumers at a time they may be looking for it, and also a way to mitigate the impact of tariffs.

[Mary Fox, President at The Lovesac Company]

Thank you, Tom. It's a great question. We're thrilled. As you remember, we announced back in quarter one about launching Loved by Lovesac, which is our resale platform. Initially, we went live in one state in Texas. We've now added five more states, and you're going to see a lot more states being added. You're absolutely right. I think it helps build our value proposition because it really shows that you can have this product for the rest of your life if you choose to. If you change your mind and you want different covers because you just want a different aesthetic, we will be able to build out that trade-in element that we've also talked about. We're doing a pilot at the end of this year, and then we'll have that really rolled out next year.

[Mary Fox, President at The Lovesac Company]

We've always talked about activating the right side of our flywheel, enabling that customer lifetime value. It's a huge advantage for us. No one else can do it. It's something that we can do very profitably and effectively, but also build that loyalty for our customers. Just very excited to start to see that building and look forward to sharing more as we continue to expand the state. Thank you for the question, Tom.

[Tom Forte, MD & Senior Consumer Internet Analyst at Maxim Group]

Thanks, Mary. Thanks for taking my questions.

[Operator]

Thank you. Our next question comes from the line of Matthew Butler Koranda with ROTH Capital Partners. Please proceed with your question.

[Matthew Koranda, MD & Senior Research Analyst at Roth Capital Partners, LLC]

Thanks. Just wanted to touch on the progression of the quarter. You mentioned the category improved, I think, across the quarter and sustained into July and perhaps into August. Did you see a pickup that was kind of commensurate with that in your own comp performance during the quarter, and how have you tracked sort of relative to the category quarter to date?

[Mary Fox, President at The Lovesac Company]

Yeah, no, thank you, Matt, for the question. I think quarter to date, you know, we feel really good in terms of our underlying performance. Obviously, you know, having got through Labor Day event, that's obviously a very key tempo moment for this quarter. All of that is baked into our guidance and demonstrates us continuing to gain share because whilst Shawn talked about it at the beginning, the category showed a little bit more improvement. It's still down, you know, and as we've shown with our results, we continue to gain that mark. Which,

[Mary Fox, President at The Lovesac Company]

You still see it being promotional. I think you're always very close to tracking us and seeing what's happening in the category, and it's just not stepping down from those holiday peaks, which is why Keith talked about that promotional pressure. For us, it's really how do we continue to plan knowing that the macros are still challenging? Customers are still a little bit more reserved around big purchases. The tactics around personalized offers and really driving them into the showroom is so important. What's also really positive for us is we're not seeing any trade down. Sacs is actually at its highest level of penetration that we've seen for a long time, and that's a premium fill choice. Recliner is the best innovation that we have launched, and it's being factored into so many customers' purchase with us.

[Mary Fox, President at The Lovesac Company]

We just see a lot of opportunity when we give them great product, even though there are those pressures that we can win. We stay very close. We continue to test and learn through what continues to be challenging, as Keith touched on, on the promotions, very similar through the quarter and as we plan for the rest of the year.

[Matthew Koranda, MD & Senior Research Analyst at Roth Capital Partners, LLC]

Okay. I appreciate that, Mary. Just curious, the customer response to some of the pricing actions you guys have taken on sectionals, especially in the last few months. Has it changed conversion from the quotation pipeline in any way? Are you seeing responses where folks trade into the, I guess, now Snug? What's the way to think about the customer response to those pricing actions?

[Mary Fox, President at The Lovesac Company]

Yeah. I mean, I think the one I can really talk to because it's been in market for longer is, you know, we did a surgical price increase back in quarter two. We did see a very clear opportunity in terms of kind of our value prop, and all our competitors have taken price for years and even at the beginning of this year. You know, we feel very, very good around where we're positioned. Certainly from that, we haven't seen any trade down, which I think is kind of your question, down to opening price point fabrics from some of the higher fabric choices, and not seeing any shift from that increase in terms of the units that people are selecting. I think that one we feel very good on. The second one we just put in place, so it's very early days.

[Mary Fox, President at The Lovesac Company]

We are just going to keep a read on it. Customers, you know, they expected increases because I think they hear about tariffs and price increases pretty much every day at the moment. Certainly, as our team, one of the key superpowers we have is around just the direct communication with our teams and really giving them great tools. The value proposition work we've just done actually made us feel even more confident about how great our product is and really, you know, no one else comes close to it. We've equipped them with even more tools to be able to tell that story and, you know, not seeing any resistance to date. Again, you know, we've got to stay close to it, certainly as a tariff will put more pressure more broadly on the customer.

[Matthew Koranda, MD & Senior Research Analyst at Roth Capital Partners, LLC]

Okay. I appreciate that, Mary. Maybe just for Keith, the gross margin progression, I know it's been covered a little bit, but I just wanna make sure I understand it clearly. Third quarter, the headwind is really we're still not lapping the heavier promotions from last year. We have the heavier promotion putting pressure on product margins and then heavier tariff pressure as well in the third quarter. That flip to the positive, or I guess flash to positive gross margin that's implied in the guide, comes from basically just lapping promos from last year. Maybe just help us on, help me understand that a little bit more.

[Keith Siegner, EVP & CFO at The Lovesac Company]

Yeah. A couple of things there. Number one, generally speaking, you're right there, which is we didn't really step up the pace of promotional offers until Q4 after the initial start for the Cyber Five holiday came in below our expectations. That's when we dialed up the promotional intensity with gift with purchase, surgical offers that were available to our showroom folks to get conversion rates higher, all that kind of stuff. That started mid-Q4 last year and had a meaningful effect on that quarter. We still have a lower promotional intensity lap in Q3, which is a meaningful headwind. That largely goes away in Q4. That's the biggest piece. The second piece is if you think about it from a tariff impact as a relationship to sales, because I can't use dollars because the sales volumes are so different by quarter.

[Keith Siegner, EVP & CFO at The Lovesac Company]

If you think about it from a relationship to sales, it's several hundred basis points more impact in Q3 from China tariffs and others than it was in Q2. That eases off quite a bit in Q4, not quite to the Q2 levels, but well below Q3. You put those two things together, and the midpoint of the range is really more like a flat growth, sort of like a flattish gross margin year over year. If you think of it that way, we're not actually calling for expansion in gross margins in Q4 year over year. Those two pieces actually give you the vast majority of the answer right there.

[Operator]

Thank you. Our final question this morning comes from the line of Brian William Nagel with Oppenheimer & Co. Inc. Please proceed with your question.

[Andrew Chasanoff, Director - Equity Research at Oppenheimer & Co. Inc.]

Hi. This is Andrew Chazen offline for Brian. Thanks for taking our questions. Just a few quick ones. In terms of just gross margin, how are you guys thinking about what the unmitigated tariff cost for Lovesac is right now? Does your guidance contemplate any further pricing actions in addition to what you've already discussed?

[Keith Siegner, EVP & CFO at The Lovesac Company]

I'm not sure about the first part of the question. We are not building in any incremental changes to the tariff regimes right now. For example, the press that's been in place about additional considerations for furniture is a category that is not factored into the guide. We are using the current in-effect tariff rates as the basis for our outlook. There are many plans we have in place, as I discussed, that are going to, you know, some of which take a little bit longer to put in place to get the gross margins back to the target levels, as I explained earlier. If the tariff regime changes again, all those plans will change again, not just for us, but for competitors as well. We have lots of things we're working on in the background to improve the gross margins.

[Keith Siegner, EVP & CFO at The Lovesac Company]

We're not counting on those for the guide that you see in Q4, all right? That's more of a long-term, several quarters, get us back there play. We'll continue to react accordingly, as will most of the peer group. If there is anything either materially negative or favorable that comes out of this, we are ready to adapt.

[Andrew Chasanoff, Director - Equity Research at Oppenheimer & Co. Inc.]

Awesome. If I could just follow up quickly on the expense side, understand that you've discussed kind of the marketing in detail, but is there any reason to think that the expense profile of the business is changing as we go into back half 2025 and into 2026?

[Keith Siegner, EVP & CFO at The Lovesac Company]

No, nothing material. The only thing I would point out, to remind everybody, is in Q4 of last year, we had an unwind of incentive compensation given the weaker than expected performance within the Q4. This year, as we've said all year, we expect to have higher SG&A as a % of sales in Q4 than we did in Q4 of last year because, again, as we've been planning, we're not planning for an unwind of previously accrued incentive compensation like we saw last year. That's the only thing to call out. You'll see that when you back into what Q4 guidance is, which you can get to pretty cleanly from the full year minus the Q3. It is a higher SG&A in Q4, but that's the reason why. There's nothing else.

[Keith Siegner, EVP & CFO at The Lovesac Company]

It's more structurally as the growth continues to hopefully pick up and we get some category support, you know, that in effect will drive same-saw omnichannel comparable sales for us, which has far greater flow-through than some of the other pieces. If the category bounces back, you get a big acceleration and step up in the amount of top line that flows through to the bottom line. That's what we're hoping for. We're not counting on it, but we'll take it.

[Andrew Chasanoff, Director - Equity Research at Oppenheimer & Co. Inc.]

Awesome. Really appreciate it. Thank you.

[Operator]

Thank you. This concludes our question and answer session. I'll turn the floor back to Mr. Nelson for any final comments.

[Shawn Nelson, Founder, CEO & Director at The Lovesac Company]

Just a big thank you to the investors that support The Lovesac Company and our pursuit of building the most loved home brand in America, and to all of those sackers out there that have made this company so great, onto a bright future. Thank you.

[Operator]

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

Participants

Executives

• Shawn Nelson, Founder, CEO & Director
• Mary Fox, President
• Keith Siegner, EVP & CFO

Analysts

• Caitlin Churchill, Managing Director at ICR
• Maria Ripps, MD & Senior Research Analyst at Canaccord Genuity Inc
• Michael Baker, MD & Senior Research Analyst at D.A. Davidson
• Eric Des Lauriers, Senior Research Analyst at Craig-Hallum Capital Group LLC
• Tom Forte, MD & Senior Consumer Internet Analyst at Maxim Group
• Matthew Koranda, MD & Senior Research Analyst at Roth Capital Partners, LLC
• Andrew Chasanoff, Director - Equity Research at Oppenheimer & Co. Inc.