The Lovesac Company (LOVE) Earnings Call Transcript & Summary

Thanks. Morning, everybody. Joining me today are Shawn Nelson, our Chief Executive Officer; Mary Fox, President; and Keith Siegner, Chief Financial Officer. Prior to beginning, I want to note that certain material covered in this discussion will contain forward-looking statements about upcoming events and how our finances will perform going forward. That covers remarks concerning what we expect ahead, our financial projections, plus our plans and prospects. Results in reality could vary substantially from what those statements describe; to review these risks and uncertainties, please look at the company's SEC filings, among them today's press release. You shouldn't treat any forward-looking statement we make as a forecast of what will happen. Each forward-looking statement made during this call reflects assumptions and beliefs held as of today, and we assume no duty to revise them, unless applicable law requires it. Today's discussion will also reference non-GAAP financial measures, among them EBITDA and adjusted EBITDA; those non-GAAP figures ought to be viewed alongside our GAAP results, not as a replacement for them or on their own. A reconciliation from the most directly comparable GAAP financial measure to that non-GAAP financial measure appears as supplemental financial information in our press release. At this point I'd like to hand the call over to Shawn Nelson, Chief Executive Officer of The Lovesac Company. Shawn?

Hello, everyone, and thanks for being here today. To kick things off, I'll give you a big-picture look at how we performed in the second quarter, then update you on our Designed for Life product platforms and share how we're thinking about the rest of the year. After that, I'll hand things over to Mary Fox, our President. Mary will walk you through our tailored customer acquisition engines and the key growth enablers. Then Keith Siegner, our CFO, will go over the financial results and give you more color on our Q3 and fiscal '26 outlook. Now, on to the second quarter. Overall, we're pleased to have posted results that met or modestly exceeded our expectations across each metric — marking one more quarter of revenue expansion, driven by our long-term growth strategies spanning Designed for Life product platforms and effective customer acquisition engines. In Q2, total net sales came to $160.5 million, a 2.5% increase compared with the same period last year; those figures indicate we picked up market share despite the ongoing challenges our category confronts, which we figure contracted about 4% during that comparable stretch. Total omnichannel comparable net sales climbed 0.9% for the quarter, while the remaining growth stemmed from contributions of new and non-comp touch points. The strength of our balance sheet remains intact. Between the inventory we hold and our net cash position, we've got considerable room to maneuver — enough to absorb tariff-related disruptions, move faster on growth, and drive better returns on capital. What a thrilling time this is for Lovesac. For several years now, the home sector, and really all of high-ticket consumer goods, has been struggling. A lot of people in our space keep holding out for the housing market to bounce back and for furniture replacement to return to a normal cadence. Throughout that stretch, we've done two things at once: kept a tight grip on costs so we operate efficiently, and shielded the sizable sums we're putting into innovation, because that's what builds real, lasting worth for everyone with a stake in this company. We've accomplished that while maintaining profitability each year and a robust balance sheet. During our Investor Day presentation in December 2024, you might remember, we compared the brand we're striving to create at Lovesac to an oak tree—broad, towering, sturdy, and long-lasting. At present, the external world perceives just a handful of this tree's limbs, specifically the Sactionals and the Sacs, plus some accessories and supplementary items on the periphery. However, we committed to introducing additional branches in the years ahead, with certain ones standing for completely new rooms within the home. At that point, we introduced the initial launch of a new platform—or an entirely new limb on this tree—a platform that remains in the living room, called the EverCouch. This latest EverCouch is currently making its first appearance, backed by brand-new advertising that is being deployed as we speak. Mary will walk everyone through what we've seen and accomplished with EverCouch in just a few minutes, but once we sharpened the strategic road map for this crucial shift from a company centered on products to a genuine brand, it turned obvious that our positioning needed to be honed and narrowed via a brand evolution refresh for Lovesac; this brand evolution effort has been underway throughout the last year alongside a top-tier branding and design firm. And it worked out well that Heidi Cooley, our gifted new CMO, has now fully onboarded and can drive this initiative through to the finish; this effort has established a clear and dependable base upon which we can grow Lovesac into a multifaceted home brand, supported by an organized, prioritized product hierarchy and merchandising strategy. That will let us not only confidently stretch the brand wider, but also further into the categories where strength already exists, so we can fight even harder for market share. On that note, we see plenty of chances to quickly harvest Lovesac brand equity, generating additional revenue and margin dollars from current markets and customers via incremental new product development and channel expansion. In our view, this represents the fastest and most believable path toward stronger profitability and long-term expansion in the near term, since we're strengthening Lovesac's foundation first, prior to deploying this wider approach to enter new rooms as we chase the more dramatic growth possibilities that are still more than a year off. Rethinking the brand and restructuring how products are organized has led us to reexamine everything — from what we call new items to some of those new items themselves, plus the avenues by which certain new and even current offerings could and ought to be made available. We'll share additional details later, though it's true that we're spotting major possibilities in fresh channels — particularly involving several upcoming items we're nearly ready to unveil, all of which stay within the living room category. Meanwhile, so we can line up more effectively with that updated approach to products and channels, we've chosen to give the EverCouch lineup a new name: from here on it will be known as Snugg by Lovesac. Our new campaign launched this week, featuring an updated visual identity that you'll probably notice across television and online channels in the coming weeks. It's a better match for what we're selling, because the Snugg lineup — the Snugg sofa, the Snugg Love seat, and the Snugg chair — represents the full range of what Lovesac provides. You can wash it, upgrade it, ship it, move it, and it's cozy and comfy, yet it comes in a relatively compact form that suits any room and keeps looking brand new indefinitely. We're pleased with how it has performed so far, and its introduction has now reached 100 of our brick-and-mortar stores. We said we'd provide more specifics in upcoming quarters about what came out of our brand evolution efforts, along with our product road map, hierarchy, and channel strategy, as we roll out additional pieces. That said, you can count on this: we take pride in having gained considerable share even during these challenging years for the category — and keep in mind, Furniture Today recently placed us at #19 on its list of the biggest home furnishings retailers. We intend to grow well beyond that position. Considerable, foundational investments have gone into this brand and into new products that you'll see hit the market beginning right now with the Snugg product line, and additional ones will follow in later quarters and years. Now to the macro picture. The category has improved just a little, with total furniture spending declining 3.7% between May and July, and July came in strongest among those 3 months. Relying on July as a turning point in the trend would be premature, given that we've occasionally seen stronger months emerge over the past year. Because of that, our planning baseline stays the same as our initial outlook: a full year for the furniture category that's down mid-single digits. Regarding net sales, we're keeping our focus on what we can control. I said earlier that we plan to drive growth through our secular growth initiatives, and we delivered growth during the first and second quarters of the fiscal year. Keith will go into more detail shortly, but we expect growth for the entire year even without any help from the category, and that remains consistent with the annual net sales guidance we originally provided. Turning to profitability, these are very unusual times, with the rules changing all the time, especially around tariffs.

During our previous call, we pointed out that, assuming no significantly altered circumstances, we believed our prior annual guidance could absorb the possible effects of tariffs, heightened promotional discounting, and the Best Buy exit fees. Because of our distinctive business model—featuring elevated product margins, redundancy across geographies, and robust partnerships with vendors—we have many levers at our disposal. Our mitigation efforts have advanced well, among them chosen price adjustments implemented early in the fiscal third quarter. That said, as the tariff environment has deteriorated further and competitive discounting keeps weighing on us, we have reduced our gross margin range, and that has correspondingly affected our bottom line ranges. Crucially, we have pinpointed further actions that will help gross margins starting later in this year and continuing across upcoming quarters, and we think these will eventually underpin the high 50s, near 60% level we mentioned before. In a few minutes, Keith will walk through our revised guidance ranges. Briefly, though, we project fiscal '26 will be yet another strong year of share gains alongside absolute growth within a shrinking category. By pricing selectively, keeping a tight grip on controllable costs, and finding efficiencies in marketing spend, we think we can grow bottom line profit margins and dollars up to the midpoint of the range and finish the year with a robust base for what lies ahead. To wrap up, we remain dedicated to hitting our objectives, drawing on Lovesac's inventive product lineup, solid customer connections, and operational strength to expand no matter what the category does in the near term, while keeping a clear focus on long-term strategy and value creation. Our refreshed brand evolution initiative now opens the door to the next stage of executing toward our target of 3 million Lovesac households by 2030 and becoming the most loved home brand in America. And though we aren't simply waiting for it to happen, we think that once the comfort seating replacement cycle accelerates and housing turnover picks up again—which is one day nearer than it was yesterday—Lovesac will be positioned to seize that opportunity right away. This extra revenue growth ought to generate still greater flow-through from top line growth into bottom line growth, plus further margin expansion on top of that, backed by our secular initiatives. Lastly, I want to express gratitude to our committed team members, who labor relentlessly to launch our innovations in the market and provide an outstanding customer experience. Each of you is contributing to transforming the home furnishings sector with products built for life, thus generating long-term value for every stakeholder. Before passing things to Mary, we would like everyone on this call to observe a moment of silence honoring the victims and survivors of the 9/11 attacks, the courageous men and women who responded that day, and the families who are still grieving; let's do that right now. Thank you. Mary?

Thanks, Shawn, and good morning to all. Following Shawn's summary of our Designed for Life platforms and the robust numbers we posted in quarter 2, I want to turn attention to our second superpower: the customer acquisition engines crafted specifically for each Designed for Life platform, plus the growth enablers propelling us forward. Let me remind you why these acquisition engines pack such a punch — effectively a superpower — because we can combine varying blends of brand and performance marketing, digital configuration via lovesac.com, outstanding showroom encounters, and cost-effective partnerships to optimally influence each product platform. When executed smartly, we can generate customer awareness efficiently, turn that awareness into buyers, and in the end establish lasting relationships and brand Love. To begin with brand and performance marketing: Shawn offered a few early highlights from our brand evolution efforts and what lies ahead, and you will witness much more of that work flowing through marketing over the next quarters. Even so, we have already started refining our marketing mix as we create awareness for our brand and energize customers with both our core design for life platforms and our newest innovations; during quarter 2, we emphasized mid-funnel tactics. On an encouraging note, traffic and return on ad spend rose compared with last year, fueled by our renewed emphasis on CTV and YouTube — with intentions to broaden those partnerships during the second half of the year — along with capitalizing on answer engine optimization through Google and Microsoft. Our social media and partnerships group performed brilliantly in quarter 2, keeping Lovesac at the leading edge of culture across every one of our product lines. We teamed up with influencer and author Eli Rallo to put on a trendy BookTok themed event at Bibliotheque in New York City. Important editors and influencers came to try the PillowSac chair in person and hear a special reading from Eli's forthcoming book release, which generated more than 227 million earned media impressions and 1.1 million social media impressions from 51 influencers. We also enjoyed 2 fantastic partnerships in quarter 2. During the last week of the 2025 FIFA Club World Cup, Michelob ULTRA and Lovesac appeared at the Pitchside Club in New York City. The Lovesac Lounge served as the ideal comfortable place to take in the matches, outfitted with Sactionals with StealthTech plus custom Michelob ULTRA soccer ball themed sacks and < >. After that we joined forces with Van Leeuwen, an ice cream brand based in Brooklyn, for their National Ice Cream Day campaign honoring the 10th anniversary of Honeycomb, their best-selling flavor; we produced 3 limited edition Van Leeuwen ice cream snack covers drawing inspiration from their fan favorite flavors, among them Honeycomb, Strawberry and Sicilian Pistachio. This amounted to a 360-degree partnership encompassing PR influencer events, organic social e-mail SMS coverage and website placement, and it earned more than 40 million total earned impressions. Lovesac's distinctive market position, paired with our ability to activate, lets us keep pace with culture. In quarter 2, we tapped into viral moments like Coldplay gate, Love Island, and Labubu, and those efforts delivered results 2x better than our benchmarks. Before we get into our digital configurations, let's take a minute on our newest innovation, Snugg — a huge opportunity that places Lovesac directly in the $14 billion couch category. This new line, offering stylishly adaptable couches along with love seat and chair choices, had a soft launch in quarter 2 across 27 showrooms and on lovesac.com, with a learning agenda centered on our selling experience. Early soft launch results are encouraging, and momentum will build since we've already grown showroom count in quarter 2 to 100 and counting. That said, starting earlier this week, with full rebranding now in place, we kicked off our formal marketing campaign. You'll see plenty of the brand and performance marketing elements we've already talked about come to life; it all starts with an engaging campaign featuring one of the hottest and most culturally relevant celebrities, Brittany Snow. This marks only the start of many new ways we intend to effectively build Lovesac into a multifaceted home brand that customers trust and love, all guided by the brand evolution work we're finishing, and we look forward to sharing more in the quarters ahead. Second is our digital configurations and how we bring Lovesac to life online. As we introduce new product lines, Snugg included, we keep investing in optimizing the digital experience. Our research shows customers shop differently for sectionals than they do for couches and chairs. So our digital team did extensive testing on both the website and homepage design. As a result, we significantly upgraded the top navigation, rolling out a more intuitive design grounded in furniture shopping behaviors and faster product discovery. Since launch, customers are more engaged and converting at a higher rate, with improved bounce rates, all of which contributed to one of our highest recorded digital customer satisfaction scores in quarter 2. We also keep advancing MyHUB, our customer reengagement center, always aiming for a frictionless omnichannel experience for new and repeat purchases. In quarter 2, more than 20% of EverCouch now Snugg transactions came from existing customers, which further highlights the opportunity to connect with our current customer base as we launch new products. Third is our showroom experience, the physical brand amplifiers of our Designed for Life products and the linchpin of our omnichannel model. In quarter 2, after the soft launch of Snugg in 27 locations and lovesac.com, we kept expanding this product line to just over 100 locations by the end of quarter 2, with plans to finish the rest of the chain in quarter 3. To back this thrilling new initiative, Shawn and our operations and training group ran whole-day, practical training workshops in our major markets. The initial outcomes look promising, and we've observed shoppers embracing this fresh platform even before our nationwide launch push; beyond the performance-based pay updates we discussed in the first quarter, during quarter 2 we moved forward on delivering performance transparency throughout the field by introducing upgraded performance dashboards. We're backing our retail chain by giving better insight into sales and team results, labor efficiency and the customer experience. We've additionally rolled out a digital quote management tool, which drives higher quote conversion while also reinforcing the omnichannel customer journey by ensuring uniform quote follow-up and communication across the country. Last, our partnership approach complements our showrooms. As we mentioned in quarter 1, we've kept refining our strategy to fuel our customer acquisition engines, including sharpening our emphasis on more profitable growth and better customer experiences; that's what prompted us to conclude our Best Buy partnership, which we described last quarter. I'm happy to report that we wrapped up our Best Buy exit on September 2, finishing ahead of schedule and below budget; when it comes to our Costco partnership during quarter 2, we tested and then expanded a revamped Costco display format that lifts the Lovesac experience inside a smaller footprint.

We added StealthTech demo capabilities, backed by a fresh StealthTech video test running in two important markets, with plans to roll that out to additional markets over the rest of the year. Our redesigned tower improves the footprint, opening up room for recliner demonstrations plus the new Snugg chair; with these upgrades we're set up to flex our assortment and provide a better customer experience across our Costco roadshow events. Together, those four pieces of our customer acquisition engines deliver a customer experience no one else matches, one that fuels brand Love and builds lasting relationships, and we're strengthening that further through our customer-facing services. After launching Loved by Lovesac in Texas during quarter 1, our resale platform has quickly grown into five more states, so more customers can get their hands on pre-Loved products. By adding things such as the PillowSac Chair and StealthTech combinations, we aren't just widening what we offer — we've also built the groundwork to unlock trading capability for our customers. That starts with a customer pilot later this year and will guarantee a smooth experience ahead of scaling next year. Each of these moves bolsters our value proposition of Designed for Life products: built to last, designed to evolve and ready to be loved again. What's essential to us maintaining this long-term profitable growth is our growth enablers in our supply chain, which play a pivotal role. As I've said previously, our supply chain was purpose-built for scalability and designed to support new product and platform introduction. Our team has performed wonderfully, both in transforming our supply chain and in making strong progress mitigating the industry-wide exposure, tariff costs, as the outlook Keith will share shortly shows. To tackle tariff headwinds, we put a 4-point mitigation plan in place back in April, and I'm happy to say progress has been strong on every front. The first centers on managing costs by securing concessions from our long-term vendors; every key vendor has given us support, allowing us to cut costs. Second comes manufacturing diversification, which includes efforts to further diversify manufacturing away from China alongside our long-term partners; we're still on track to be mid-teens for China for the full fiscal year, though with an exit rate well below that. Third is strategic pricing. And as I mentioned before, we made some informed price increases. Those increases came after a deep dive into our overarching competitive price positioning against numerous options in the consideration set for our customers. We're quite comfortable with where and how Lovesac is now positioned, appropriate for the quality, style, features and benefits each of our products has to offer. On top of that, this effort gave us a clearer picture of what makes up our value proposition, and right away we built and launched training and tools across the field organization, so that every one of our team members finds it simpler to communicate to customers the particular value that lives within our Designed for Life product platforms; and the last initiative for us was cost efficiency, and we have delivered and keep finding cost savings throughout the business. Finally, I truly want to acknowledge our team for how quickly and strategically they executed. Because of what they've done, we believe this 4-point plan will offset most of the tariff pressures we're facing right now; and with that, I'll turn things over to Keith, who will share more about our financial performance and our outlook. Keith?

Thank you, Mary. We'll move straight into a brief look back at the second quarter, and then we'll cover what we expect for the remaining part of this fiscal year. Starting with how we performed, keep in mind that whenever I mention the second quarter, I mean fiscal '26, unless I say something different. Net sales rose $3.9 million, or 2.5%, reaching $160.5 million in Q2 versus the same period a year ago. Showroom net sales climbed $10.3 million, or 10.4%, to $109.1 million in Q2 compared with last year's comparable period, fueled by a 0.9% gain in omnichannel comparable net sales along with the net opening of 16 new showrooms. Internet net sales fell $1.8 million, or 4.1%, to $42.5 million in Q2 versus the equivalent prior-year period. Other net sales — covering pop-up shop sales, shop-in-shop sales, open box inventory transactions, and the Loved by Lovesac program — declined $4.5 million, or 33.6%, to $9.0 million in Q2 compared with the same period last year. That drop was mainly because the company chose not to enter into any barter transactions this period. Turning to product category, during Q2 our Sactional net sales grew 4.6%. Sacs net sales fell 22.5%, while our other net sales, which take in decorative pillows, blankets and accessories, rose 2% versus a year earlier. Gross margin declined 260 basis points, landing at 56.4% of net sales in Q2 of fiscal '26, compared with 59.0% in the year-ago period, largely the result of a 110-basis-point rise in inbound transportation costs, 50 basis points in outbound transportation and warehousing costs, plus a 100-basis-point drop in product margin caused by heavier promotional discounting. SG&A expense, measured as a percentage of net sales, came in at 44.9% in Q2 of fiscal '26, against 47.0% a year earlier. That lower percentage stems chiefly from reduced professional fees, credit card fees and other overhead costs, together with stronger net sales. The better expense leverage relative to the guidance we gave earlier mirrors stricter cost control, along with reduced Best Buy costs during the transition period and connected to the final exit of that relationship; on that point, we took on roughly $1.9 million in total nonrecurring expenses this quarter tied to ending our relationship with Best Buy, which includes fixed asset impairment, closure and payroll expenses. Even with that cost, we posted a reduction in selling, general and administrative expense dollars; this came mostly from declines of $2.1 million in professional fees, $0.5 million in credit card fees and $1.7 million in other overhead costs, partly offset by $1.5 million of impairment charges tied to terminating the Best Buy partnership, plus rises of $0.6 million in payroll, $0.5 million in equity-based compensation, and $0.1 million in rent. Rent went up by $0.1 million, reflecting a $0.5 million increase in rent expense from the 16 showrooms we added on a net basis, partly offset by a $0.4 million decrease in percentage rent. We estimate that nonrecurring incremental fees tied to the restatement of prior period financials came to roughly $0.4 million during the second quarter. For the second quarter, advertising and marketing expenses rose $0.2 million, or 0.7%, reaching $23.5 million versus the prior year period. As a percentage of net sales, advertising and marketing expenses stayed fairly level in the second quarter, at 14.6%, compared with 14.9% of net sales in the prior year period. The operating loss for the quarter came in at $8.8 million, versus $8.4 million in last year's second quarter, due to the factors we just discussed. Before we move on to net loss, net loss per common share and adjusted EBITDA, please see the terminology and the reconciliation between each adjusted metric we use and its most directly comparable GAAP measurement in the earnings release we issued earlier this morning. Net loss for the quarter totaled $6.7 million, or negative $0.45 per common share, against a net loss of $5.9 million, or negative $0.38 per common share, in the prior year period. In the quarter, we recorded an income tax benefit of $2.1 million, compared with $1.8 million in the prior year period. Adjusted EBITDA for the quarter was $0.8 million, compared with $1.5 million in the prior year period. Now to our balance sheet. We closed the second quarter with a healthy balance sheet, giving Lovesac substantial flexibility to invest in growth and thereby enhance long-term value creation for shareholders. We reported $34.2 million in cash and cash equivalents, while keeping $36 million in committed availability and no borrowings on our credit facility. First, our total merchandise inventory levels match the expectations we laid out last quarter. In the second quarter, we started reducing excess core inventory levels, which helped offset the working capital needed to build EverCouch, now Snugg, weeks of stock; we feel very good about both the quality and quantity of our inventory, along with our ability to maintain industry-leading in-stock positions and delivery times, and we believe we can finish fiscal '26 with lower inventory dollars than we held at the end of both the second quarter and the end of fiscal '25. Second, our strategy for allocating excess capital opportunistically, with a focus on long-term value creation and enhancing returns on capital, remains unchanged. Because of significant uncertainty and the macro backdrop stemming from tariffs and consumer spending in the near term, we did not repurchase any of our common stock in the second quarter. Year-to-date, we have repurchased $6 million of our common stock outstanding, and roughly $14.1 million remains available under our existing share repurchase authorization. Please see our earnings press release for other details on our second quarter financial performance; so now for our outlook. Like Shawn said, in the fiscal second quarter we saw a modest improvement in category trends, though it wasn't particularly material, and it wasn't large enough to make us change the assumption behind our plans for a 5% category decline across the full year. Our new ranges do suggest better net sales growth rates in the fiscal fourth quarter, and we have plenty of secular tailwinds that help offset the category outlook and give us reasons for optimism. Those factors include annualization of fiscal '25 major product launches, our recent Snugg launch with the marketing program having just kicked off this week, a wider reboot of our marketing strategies shaped by our brand evolution work that Shawn just covered, expansion in physical showrooms, stronger financing offers via the Lovesac credit card, and an easy comparison because of missteps during last year's Cyber 5 holiday period; for the full year fiscal '26, we are narrowing our net sales guidance range to reflect 4% to 9% growth for the fiscal year. We are also making a favorable adjustment to our forecast for controllable expenses within SG&A and for marketing efficiencies. That said, even though we've made great progress handling the impacts of ever-changing tariffs and, to some degree, competitive discounting pressures, our guidance ranges assume some pressure from gross margins flowing through to adjusted EBITDA, net income and EPS. These will be most pronounced in Q3.

We've pinpointed further actions that should help gross margins starting in Q4 and put us on track toward that high 50s, close to 60% figure we've talked about reaching eventually. To be specific, looking at the whole year, our net sales estimate is $710 million to $740 million. Adjusted EBITDA should land somewhere between $42 million and $55 million. That figure assumes gross margins of 57% to 58%, advertising and marketing at roughly 12% of net sales, and SG&A at roughly 40% to 41% of net sales. Our net income estimate falls in the range of $8 million and $17 million; diluted income per common share should come in around $0.52 to $1.05, with an estimated 16.3 million diluted weighted average shares outstanding. Turning to the third quarter, net sales should be $151 million to $161 million, which works out to mid-single-digit revenue growth at the midpoint and reflects what we're planning near term for tariff mitigation. We anticipate an adjusted EBITDA loss of $1 million to $7 million. That includes gross margins of 56% to 57%, advertising and marketing at 14% of net sales, and SG&A at 47% to 49% of net sales. Our net loss estimate is $8 million to $12 million. Basic loss per common share should be $0.51 to $0.83, with 14.7 million weighted average shares outstanding. To wrap up, the category stabilizing and eventually getting back to growth still lies in front of us, though when exactly that happens isn't clear right now. Until then, we're weighing caution and efficiency against our conviction that keeping our eyes on the larger picture matters. That larger picture is the enormous long-term chance to create tremendous value for every Lovesac stakeholder. We're growing the Lovesac brand and putting money into new product innovation across style, function and category to back a strong multiyear secular growth outlook, with macro upside exposure serving as icing on the cake. With that, I'll hand it back to you, operator.

To start, as you go through this brand evolution and kind of refresh, are you expecting any adjustments when it comes to how you bring in customers, or perhaps to marketing effectiveness, over the near term?

Yeah; there's so much going on for us when it comes to brand and marketing that — I believe that will actually be a big theme across the coming few quarters. As you're aware, we have this brand refresh that's just about to hit prime time; we have the Snugg campaign, which debuted this week. And we've got a new CMO who has joined us, who is incredibly talented and genuinely thrilled to be taking those reins; and so I believe you're going to witness a great deal of change in how we go to market here at Lovesac, in how we deliver our advertising, and in how we communicate. And I think that's already visible in this Snugg campaign, which is truly distinctive. We have one of the biggest celebrities around at the moment representing this product, in alignment with the brand. You're going to see Brittany Snow across all the social channels. You're going to see a lot of really — not only exciting creative, but a fresh aesthetic to it. And I suppose the neat part is that, given the timing of that specific launch, it really pushed through much of the shift in tone, in how we go to market and spend our money, to reach prime time sooner, even with Heidi Cooley having come on board more recently. So everything is coming together nicely. And Mary, I don't know what you might want to add regarding customer acquisition and our spend.

No, Maria, I believe, like Shawn mentioned, you're going to notice it. With any luck, you had a chance to check out the Snugg campaign that went live at the start of this week, and for us it's simply essential because, in a sense, the whole push centers on demonstrating that within the couch category, whatever anyone else is capable of, we can outperform them. And I'd say we're becoming far more assured and precise with what we communicate regarding the value we offer, and truly, how do we locate the people who are thinking about making a purchase for their home, and how do we get those folks to view us as the correct option, and then convert them. At the same time, we keep right on constructing the entire funnel exactly as we've always done, and you can observe that reflected in our numbers when it comes to the ongoing achievement of picking up more share of the market. across every area. Yet with each platform at our disposal, we remain extremely deliberate about the way we go after it. And like Shawn discussed regarding certain efforts under brand evo, we've established a product hierarchy that's very clearly defined. We'll reveal additional details to you as time goes on. And this is simply going to let us be significantly more focused when it comes to figuring out how we unlock the maximum potential for each of our products, whether that's across every one of our showrooms or, to be honest, even achieving a far higher level of speed on our website. So it has truly been excellent work that helps us open up the brand through this multifaceted approach we've got for the home, and we'll be rolling it out across, as Shawn stated, the weeks ahead with the entire campaign, and afterward months and years as we genuinely are constructing this with a long-term view. So I appreciate the question.

Understood. That helps a lot. Next, I'd like to ask about Snugg, especially since it's now available in over 100 showrooms. Could you give us a sense of which kinds of partnerships — or distribution deals — would fit this platform best?

It feels premature to get into specifics. Still, let's begin from first principles, which is my preferred starting point. The truth about Sactionals is that it's an incredibly — it's the most straightforward yet wildly intricate product platform you can picture, correct? You simply purchase multiple seats, multiple sides, and assemble whatever you like; it can be deep, it can be long. There are pillows. Suddenly, this platform carries a complexity that genuinely reflects its design-for-life character, right? This is something meant to stay with you throughout your life. Snugg is far less complicated. You still receive nearly every Lovesac advantage you're familiar with, correct? It can be washed, it's somewhat changeable, yet it doesn't call for the elaborate in-person demonstration that Sactionals, for example, does. So this platform's capacity to show up in settings that aren't owned, operated, and staffed by Lovesac is obvious, and it has genuinely shaped how we think about upcoming products too. You might envision future items closer to Sactionals that earn a very high design-for-life score but demand a degree of guidance and demonstration. And you might envision more items resembling Snugg that represent the brand effectively, offer top quality, yet don't need such hands-on demonstration experiences. Consequently, our website is the primary and most crucial channel for Snugg. This is a gorgeous sofa that sits wonderfully and includes storage large enough to hold Brittany Snow. You'll actually see her climbing inside it in a few of the campaigns — it's quite amusing. And — yet it represents the brand effectively without necessarily needing as much demonstration and such. So I'm offering you a somewhat scattered explanation of this product hierarchy that we ourselves are not scattered about. We now have a far clearer understanding of how to generate sales and, toward that goal, broaden our channel approach with these items that don't need in-person demos; that's the crux of it. So I'll stop there, since it's too early to reveal new partnerships, but we're enthusiastic about both online and off-line possibilities with products that can represent the brand this way.

All right. Could you give us some additional granularity regarding what's different about the EBITDA guidance compared with where it stood a few months back? You mentioned tariffs, you mentioned promotional activity — does either one carry more weight than the other? And regarding tariffs, maybe you can offer us a bit more specificity, if possible. My impression was that tariffs were landing below what had been anticipated. At one stage, we were looking at above 100% in China. So which aspect of tariffs is turning out worse than anticipated? And what portion of the guidance cut stems from the promotional activity?

Mike, I'll take the tariff question first, and after that I'll pass it to Keith to talk about the EBITDA outlook. When we gave our last report in June, you may remember that the reciprocal rates for a lot of the main countries we buy from — Vietnam, Malaysia, Indonesia, for example — were at 10%. More recently, those rates have basically doubled, with most now at 20% or 19%, so they've moved up since our last report. That increase is included in the guidance Keith walked everyone through. At the same time, our focus remains on shifting additional goods away from China, since that country carries the largest tariff burden, and the team has performed well in that effort. Certain items take longer to relocate—for instance, some technology along with a handful of custom fabrics—so that adds somewhat more pressure for us. But Keith, I'll hand it over to you regarding Mike's question about the EBITDA outlook.

Right. Thank you, Mary, and thank you, Mike. As you know, Mike, this really comes down to gross margin. Looking at the other line items, I believe we're doing quite well at controlling the expenses we can control, and at leveraging marketing while finding efficiencies there. So let's dig a little deeper into the gross margin part. And when you look at the year-over-year deltas for Q4, we are narrowing that gap somewhat — we expect to narrow it somewhat. Let's spend a moment on that, because there are really two sources of pressure. It's something like a perfect storm: the tariffs plus, frankly, the need to raise the promotional discounts we offer because of the competitive environment. Those two factors together hit the model harder in the near term than we had anticipated last quarter, when we provided the guidance. So let's discuss the fourth quarter step-up for a moment, specifically the year-over-year delta. Look, one important point: from a gross margin standpoint, the fourth quarter compares against an easier prior-year period for us than either the second or the third quarter did. The reason is that in last year's fourth quarter, our effective discount level stepped up meaningfully. After that difficult beginning to the holiday selling season, we ramped promotions. That is the biggest single factor behind the better year-over-year delta in Q4 relative to Q2 and Q3. The other part of this is tied partly not just to the change Mary brought up regarding effective tariffs on a handful of the countries, but also to how much exposure we have to goods sourced from China. That will be lower. We expect it will be lower in Q4 than in Q3 or Q2, and that reduces the tariff burden on the P&L, while the price increases we implemented in Q3 actually stay consistent. So two things sort of happened here. First, getting custom and StealthTech manufacturing out of China has proven harder than we initially expected. We've made strong progress. We now have good visibility into it, but it took somewhat longer than we thought last quarter. And the second part is that a bit of what we expected from China sourcing to land in 2Q shifted into 3Q, which concentrates that effect; as a percentage of net sales, it's substantially higher in Q3 than in Q4 or Q2; and again, that was partly about timing relative to our earlier guidance. These are highly unusual and exogenous factors we're contending with. But as Shawn said earlier, and as I said too, we have quite a few plans in place to bring us back to those — let's call them long-term levels over time that we've talked about previously.

All right. Could I pose one thing to Shawn? Shawn, I believe you mentioned new — possibly — I'm not sure whether you refer to it specifically as the new room, but it sounds like a significant new launch, potentially a new room, and you said it's at minimum a year off. That sounds like the end of calendar 2026. Is that — I had thought it would be kind of earlier in 2026. Perhaps I got that wrong; but that new launch, new room you've hinted at, is it being delayed at all?

No. What I mean is it's a broad remark regarding these major changes arriving down the road. I'll say the notion that it would arrive early in calendar '26 isn't realistic. I think we actually do have plenty of activity between now and the new room, if you can believe that; we have a lot of truly exciting things to be announced across the next few quarters. But as it happens — as we — let me phrase it this way. As we consider moving forward into the next room, we've been quite clear that it's on its way, we will be stepping into that territory in a full way that I think will be really exciting and fairly game-changing for the brand, and it won't be a trickle. And so we still have a bit of time between now and then. I think that's a reasonable breadcrumb; but meanwhile, we also have plenty of really exciting products to launch in the living space you're familiar with. So it's a good call out.

Understood. All right. If I may, one additional question. I assume the answer is no, since we have not discussed it, but has there been any adjustment to the kind of long-term outlook all of you laid out at your Analyst Day? That outlook, once again, calls for a fairly substantial ramp when it comes to growth past 2025 — 2025 being somewhat of a down year, followed by expansion in calendar 2026 and 2027 and beyond at a far, far larger ramp. Does that remain the thinking?

Correct, Mike, that remains the thinking. Listen, given all the tariff situation this year, it has been somewhat of an odd year compared with that plan. Clearly, there was no way that could have been factored into that algorithm. We are working our way through it, and I believe we have solid plans to navigate it and then return to the intended path. Right, so you will always have a few small items along those lines. It is fascinating. At the margin levels where we sit, especially at the bottom, tiny basis-point shifts can create a very, very large impact on bottom-line EPS; yet that is also where the opportunity lies. Once we get past all this tariff business, once we are back on the algorithm, there is enormous upside on the bottom line from extremely small basis-point movements and flow-through from the top line. So fundamentally, nothing has shifted on that front. There has been a bit of noise this year owing to the distractions, but our confidence in the long term remains very strong.

Thanks for the breakdown on what's driving the EBITDA adjustment — the pluses and minuses. From what you're saying, gross margin seems to be the main culprit. Can you walk us through the actions available to you for improving gross margin partway through Q4 and as we head into next year? You sound quite confident in your capacity to pull that off, and I'd welcome any additional detail you can share.

Sure, that's a terrific question. Let me begin by pulling back for a moment and giving some historical backdrop, since I believe that matters for the broader discussion. Over a stretch of several years, Lovesac posted gross margins somewhere between the low and mid-50s; but during the past 2 years or so, we fully reworked our inbound logistics operation; we brought in automated systems; we uncovered additional efficiencies and operating procedures; essentially, we engineered a structural reset of gross margins up to the high 50s, close to 60, correct? That's roughly what we covered at our Investor Day a year ago. Our current full year guidance for this year shows a range of 57% to 58%, which remains elevated relative to history, yet it falls short of that high 50s, near 60% mark. We've pinpointed steps to return us to that trajectory, exactly as you described. So here are 5 that we believe can assist. To start, outbound logistics chances are still available to us. We've gotten through the bulk of the inbound work, but at this point we can improve warehousing, and we can improve last mile shipping. Trials for both are being developed and are already in motion. That's the first one. Second, we keep focusing on shifting where our products originate from to cut tariffs and other expenses; that's a far larger topic we'd gladly dig into. That work isn't finished. Considerable room remains to make progress there, and portions of it will require a couple of years before they're in place, yet it's a significant piece of this, and we're actively chasing those opportunities. Third, we plan to roll out new optional delivery service tiers for payment. We've also got new return policies and additional items that can assist us in offsetting some of the gross margin strain. Fourth, through the brand evolution product hierarchy effort that Shawn and Mary have described, we intend to reshape our promotional approach, shifting away, as Mary put it, from a broad-based, everything is included style of promotion toward a more variable approach spanning products and channels, correct? We're — this is on the near horizon. And my expectation is that this will assist us in bringing down overall discount levels, which weigh on gross margin. And it's a major contributor to that EBITDA shift I mentioned earlier for this year. And finally — certainly not the least important element — is that ideally, once we exit this decline in the category and return to growth, or even just to normalization, the promotional intensity among competitors calms down and eases some of the strain surrounding that major tent-pole occasion; so, as with all these matters, we have solid visibility into the action plans we intend to implement; so with any luck, that provides a bit of color.