The Lovesac Company (LOVE) Earnings Call Transcript & Summary

Thanks. Morning, all. Joining us today are Shawn Nelson, our Chief Executive Officer, Mary Fox, President, and Keith Siegner, Chief Financial Officer. Ahead of diving in, I want to flag that certain things we discuss will contain forward-looking statements about upcoming events and how our finances will perform going forward. That covers statements about what we expect in the future, our financial projections, plus our plans and prospects. Results in reality could diverge materially from what those statements lay out; to walk through these risks and uncertainties, please look at the company's SEC filings, which include the press release issued today. You shouldn't treat our forward-looking statements as forecasts of what will happen down the road. Every forward-looking statement we're making on this call rests on assumptions and beliefs held as of today, and we take on no duty to refresh them unless applicable law demands it. Today's discussion will also feature non-GAAP financial measures, among them EBITDA and adjusted EBITDA; these non-GAAP measures ought to be viewed alongside our GAAP results, not as a replacement for them or separately from them. 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 things over to Shawn Nelson, Chief Executive Officer of The Lovesac Company. Shawn.

Hi, everybody, and I appreciate you joining us. First, I'll provide a broad overview of our Q3 results, then update you on the Designed For Life product platforms, and share what we expect for the remainder of the year before turning things over to Mary Fox, our President. Mary will cover our tailored customer acquisition engines along with the main growth enablers. Following her, Keith Siegner, our CFO, will review the financial results and provide additional detail regarding our Q4 and fiscal 2026 outlook. Looking at Q3, the macroeconomic environment proved a bit more difficult than our forecast had anticipated, and consumer hesitation led to significant volatility from one week to the next, particularly in transactions at lower dollar amounts. As a result, we recorded $150.2 million in net sales for the third quarter, which landed about one million below the range we had guided. That outcome doesn't make us happy, but it deserves mention that our focus on secular growth efforts — including new products and the initial phases of a significant transformation in how we approach marketing — managed to produce a modest increase in net sales compared with the prior year, indicating that we gained share against our category, which by our estimate declined roughly 2% during the equivalent quarter and 4% on a year-to-date basis. For the third quarter, both adjusted EBITDA and net loss came in within the ranges we had guided to. The results were weighed down by gross margin contracting 240 basis points, which stemmed from elevated tariffs and transportation expenses as well as heavier promotional activity. Those pressures were partially countered by higher prices, savings on costs, and concessions from vendors. Omnichannel comparable net sales for the quarter declined 1.2%, with gains from new and non-comp touchpoints helping to offset that drop. Our balance sheet remains in a strong position, with inventory and net cash both at healthy levels. Keith will walk through this in more detail shortly, but we are still on course to close out the fiscal year having right-sized our inventory carry relative to the previous fiscal year, and carrying a very solid net cash balance with no borrowings. Our efforts have been focused on getting Designed For Life's new products out into the market. By this point, everyone knows about our Snugg platform, which now plays a significant role in both what we sell and how we present things in stores. We also managed to roll out the national ad campaign for Snugg during this quarter, and Mary will share additional details on that shortly. Beyond that, there was further news tied to the fourth quarter and the holidays. We introduced a new addition to our accent chair lineup, which has been incredibly popular: the PillowSac Chair Jr. It offers that same cloud-like coziness, high-quality materials, and flexible design, but now it's been carefully sized down for tighter spaces — whether that's living rooms, apartments, bedrooms, or reading corners. We rolled out a fourth arm choice for Sactionals as well — the Swept Arm. Since this design has proven to be the clear top pick for the Snugg, our Sactionals buyers made requests, and we delivered. Adding a sleeker look to the platform, the Swept Arm became an immediate hit. We've also updated the Quick Ship cover selection for Sactionals and added fashionable limited edition fabrics for Sacs and Footsacs, capping off a stretch of several months filled with new product introductions at Lovesac. Now let's spend a bit of time discussing how our brand is developing and where our strategy is headed. First, last quarter we covered the initial insights from our brand refresh and what they indicate for the plan shaping our approach. We recognized that our positioning had to become sharper and more focused, so that we could not only stretch this brand further with confidence, but also push more deeply into the categories where we’re already strong. Using the groundwork our new team has put in place, we’re reworking our marketing playbook, which ought to let us fight harder for share in rooms we’re already in as well as new ones. Next, with category declines now stretching 4 years and lingering doubt about where the consumer goes from here, it’s plainer than ever that caution demands we stay pragmatic when modeling possible upside in this macro environment, or even from secular initiatives under these conditions in the near term. We aren't building our strategy around any expectation that either shoppers or the sector will bounce back soon or even in the mid-term. Combining those two factors, our view is that the smartest approach over the next several quarters—the place where strategy pays off best—is to take what we've already created with this brand and cash in on it, reinforcing where we stand in the living room while grabbing even more share there, and at the same time shoring up the value of our brand. There's a huge chance to spark growth in the main Lovesac operation through Designed For Life line extensions, and by making the most of the early positive signals we're seeing in how we bring in customers, which follow from the brand evolution effort that's already behind us. So how should we interpret all of that? I'm excited to give you more specifics, because we're expecting calendar 2026 — that's our fiscal 2027 — to be the biggest year we've ever had when it comes to rolling out new products and making other announcements. And right at the heart of how we position ourselves, the things we're planning are important to our customers, get to market fast, and don't take much spending before they arrive. Let me give you a handful. The Snugg sofa is our latest platform, and we plan to open it up through extensions that respond directly to what early consumers asked for. Basically, the Snugg is capable of more — both in a literal sense and a figurative one — and that's going to happen over the next year. Another thing we're going to do is make the most of how our channels perform, building on the fact that Snugg got off to a remarkably strong start in our digital business and at Costco. Our goal is to make Sactionals the real engine of the Lovesac brand. To get there, we're doing a full overhaul of the core inserts, which will allow us to produce them here at home, bring in new features and advantages that our customers will be excited about, and create an opening to update our entire set of patents and other IP protections covering Sactionals. And there's more good news: Sactionals built from these new materials will pair perfectly with every version we've sold before. This matters a great deal, and it reflects a lot of hard work from our own talented team along with some outside partners. We've had this in motion for some time, but the tariff situation this year pushed us to move faster. Just so we're clear, we've already made substantial progress on this front, collaborating with both current suppliers and a few new ones, and we're confident that domestic production of our main SKUs can kick off this summer on a gross margin neutral footing — possibly even margin favorable. That's achievable thanks to a distinctive Lovesac edge: large quantities of a narrow set of SKUs, which makes automation viable and forms the foundation of how we now approach new product development across every category. Made in the USA Sactionals — better and, we hope, less expensive — is the aim, and it's only a few months off. Alongside a broader Snugg platform built to bring the brand's entry price down, we're thrilled to introduce a new premium sectional sofa platform slated to arrive mid-year. It's a separate offering from Snugg or Sactionals, featuring a distinct look, an even bigger footprint, and a different use case compared with Sactionals or Snugg, aimed at the higher-end buyer — the segment where demand looks strongest at the moment. We further think it can serve as an anchor from above for the Sactionals value proposition, boosting consumer regard for our workhorse product, which today sits right in the middle on price. Following that, we intend to ease friction for customers by eliminating the number one reason people give for not buying Lovesac, based on their feedback: the absence of tiered delivery and setup choices.

In November, we rolled out scheduled Room of Choice delivery, and the response has been great. After that, our plan is to run a beta test for white-glove delivery along with assembly by Q1, then launch it formally as soon as we can after that, fueled by demand we can measure and opening up fresh revenue possibilities for Lovesac; we've also got additional introductions lined up to fuel secular growth in the year ahead that we're not ready to reveal just yet, drawing on both of our superpowers — Designed For Life products and our tailored customer acquisition engines. Expect to hear more from us over the next few quarters. As part of this strategic direction, we've made the decision to push the debut of our next new room back a few months, into early calendar 2027. That move lets us put priority on a slate of exciting near-term initiatives that we think will generate more efficient growth and profitability amid this challenging macro environment. It also buys us the time required to get ready for a major category-defining launch of this new room, and we plan to bring it to market with a significant splash. Keep in mind that, as part of this clear focus on winning the living room and igniting the core, we are temporarily slowing down how quickly we expand physical stores in the year ahead. That will let us set the optimal omnichannel strategy for a multi-room brand, with the Lovesac store of the future serving as an essential element of our customer acquisition engine superpower in the years ahead. Turning to our outlook, starting with the macro, the modest improvement in category trend has carried on, with low to mid single-digit declines recently versus mid single-digit declines a few months back. Even so, weakness has grown more pronounced on our end in lower dollar volume transactions, let's say under $6,000, and that produced the slight shortfall in the third quarter. Because of this, we've already made adjustments to our marketing and promotional strategies. The all-important Black Friday and Cyber Monday holiday weeks have been very encouraging, posting strong growth already against last year; that said, as I mentioned earlier, these trends contain more peaks and troughs than we saw in prior years, and we also face tougher comparisons ahead over the New Year's and January holidays, when we ramped up our conversion efforts last year. Recent performance certainly gives us heart, but we still opt to keep an abundance of caution. Keith will walk through our updated guidance ranges in a few minutes, but in short, we project this year, fiscal 2026, to be one of modest market share gains for Lovesac, with absolute growth even as the category declines, and with encouraging green shoots now appearing from all of our strategic adjustments being implemented in Q4 and into the new year. Switching to leadership and governance, we're thrilled to welcome a new member to our top leadership team this quarter. Jacob Pat has come aboard as Lovesac's new Chief Technology Officer. Jacob’s deep background will help us move faster on our digital transformation efforts, and at the same time, Lovesac keeps expanding and strengthening the mix of skills and experience represented on our board. After welcoming a veteran global technology executive, Alan Boehme, in August — whose résumé includes H&M, Coca-Cola, and other companies — we’re delighted that Wan Ling Martello has joined our board very recently. Wan Ling has an outstanding record of generating transformational growth, serving on the board of Alibaba and formerly on the board of Uber, and she also brings firsthand experience as a senior C-suite leader at several of the largest and most admired consumer and retail businesses worldwide; she is a tremendously valuable addition to our board, and we’re proud to count her as an advisor. Her demonstrated skill in allocating resources based on data and in digital transformation that fuels consumer engagement fits exactly with our purpose as a technology-driven furniture company. Lovesac amounts to far more than its individual pieces. Lovesac is a brand — one we believe will become the most loved home brand in America in fairly short order, and eventually the most loved brand in America, period; that is what we aim for. We keep inventing and investing, even during these difficult times for this category, while also managing cash flow generation and profitability. Our lofty goals start with hitting our target of 3 million Lovesac households by 2030 — households that will own even more Designed For Life products across even more rooms of the home. We remain entirely focused and dedicated to this midterm objective, which will deliver significant growth over the coming few years, no matter what the macro environment does. Though our ambitions are large, we are patient; we understand that we must refine our strategies, adjusting to today’s economic conditions and competitive realities. Capitalizing on the brand we have built to win the living room, along with the categories where we already hold so much brand equity, is the correct approach for this moment. Profitable growth and market share gains produced by disciplined execution create the ideal setup to make a big bet on launching that new room in early calendar 2027, when the consumer and the category are, hopefully, on stronger fundamental footing as well; with that, I’ll pass it to Mary.

Thanks, Shawn, and good morning to all of you. Picking up from Shawn's review of what we call Designed For Life platforms, I'd like to turn attention now to a second superpower of ours — the customer acquisition engines — along with the growth enablers driving our momentum. Just to remind you, the reason these acquisition engines pack such force, functioning as a genuine superpower, comes from our capacity to combine varying blends of brand and performance marketing, digital configuration via Lovesac.com, remarkable showroom experiences, and productive partnerships, all tuned for the best outcome across each product platform. When executed smartly, we can cost-effectively create customer awareness, turn that awareness into buyers, and in the end forge lasting relationships and brand affection; so let's begin with brand and performance marketing. The third quarter marked merely the start of an evolution in how we approach marketing and media strategy. Our opening move involved modernizing the go-to-market approach and media mix so we could deliver more personalized messaging, better reaching consumers in the places where they meaningfully engage with content. The initial numbers looked promising to us, and there are several standout items I want to mention: campaigns tied to culture that starred people like Brittany Snow and Bethenny Frankel, seasonal pushes including Sacs to School, and fun efforts such as the NFL season kickoff we did with New York Giants stars Jaxson Dart and Cam Skattebo. Beyond those, we ran a lengthy series of activations with CBS, NCIS, a throwback partnership involving The Twilight Saga, and others; even so, as Shawn pointed out, in quarter three we ran into additional strain across our smaller and mid-range setups following the recent price hikes we made to counter the tariff impact. Those kinds of configurations usually move in step with a middle-income shopper, and the pattern we observed matched what the wider category was doing — less upgrading and a bit of downgrading. The calendar happened to help us, because the second phase of our marketing evolution launched right when we needed it to address that trend during the crucial fourth quarter. We had to adjust our method, putting a keener emphasis on attracting and converting people who were already near a purchase; achieving that required further moves away from conventional media like linear TV and toward more paid influencer work, programmatic digital channels, and other engaging digital content that highlights what makes Lovesac distinctive along with our value proposition. Also, we're expanding into AI-driven search and content generation, and that might bring us meaningful gains. Of course, we support that with attractive promotional pricing, particularly for lower-ticket purchases and entry-level offerings. What's promising is that the Black Friday and Cyber Monday stretch together posted solid improvement over the prior year. There's obviously a good chunk of the quarter remaining, with New Year and January still ahead, yet this is a positive beginning. The second point concerns our digital configurations and the way we present Lovesac online; that matters a great deal, and we carried considerable momentum into Q4. Our site stands as the largest and easiest-to-reach point of sale we operate, and since the marketing and e-commerce teams were restructured in September and our marketing playbook was rebuilt, we've been moving quickly to refresh and reshape how we approach it; put simply, what we've created is a digital ecosystem that's more unified and quicker to react. Across the site we established stronger destinations — the homepage, seasonal guides, appealing bundles, and others like them. As shoppers started actively browsing choices for their homes, these destinations generate more pertinent entry points and offer more obvious routes for finding upgrade possibilities and additional items. Backing this is a beefed-up media and advertising plan; we grew our digital footprint and widened our mix of tactics with fresh NBA placements via FanConnect plus Reddit product ads; we rolled out Roku, Showcase, and Pause formats, bolstered YouTube content and keyword alignment, extended programmatic reach, switched on AI-powered search optimization, and produced updated holiday CRM creative. One illustration of the effect: among small and mid-range configurations, we noticed promising signals as the quarter went on. What started out as softness in the middle of the quarter shrank during quarter three's closing weeks and shifted into growth once quarter four arrived. During the Cyber Five period, that momentum only accelerated. We posted our strongest Cyber Monday ever, beating the previous year and the year before that by a comfortable margin — obvious evidence of the difference it makes. Snugg, meanwhile, continued to shine online, driving meaningful growth from one period to the next and showing just how enthusiastically shoppers embrace the platform in digital channels. The third piece is our showroom experience — the face-to-face brand boosters behind our Designed For Life lineup. In Q3, we introduced a fresh customer demonstration framework called the Brand Tour: a consistent, repeatable walkthrough designed to guide shoppers through the value, flexibility, and performance of our different products, Snugg among them, and it's now fully in place ahead of the holiday selling season. Initial indicators show that the Brand Tour is helping associates give stronger, more persuasive demonstrations and build a richer understanding among customers, while also spreading our Designed For Life narrative to every store. Because of this, in-store customer satisfaction has risen consistently throughout the year and remains significantly higher for those who experience a demo, pointing to the tour as a positive contributor to the overall experience. Finally, our partnership model completes our showroom lineup, and in quarter three we significantly broadened our Costco collaboration. Our bundled offers now include the Snugg Sofa and Accent Chair, Sactionals Reclining Seat, along with five additional fabric options. We installed improved roadshow fixtures, enabling live demonstrations of StealthTech capabilities — a major point of distinction that sets us apart from other seating available at Costco. We enhanced the digital shopping experience on Costco.com, which is driving accelerating trends there. Finally, we brought Lovesac's reach to Hawaii and Alaska, setting us up for further market share gains. Taken together, these four elements of our customer acquisition engines produce a customer experience without equal that fuels brand love and makes long-term relationships possible, and we're strengthening this even more through our customer-facing services. Starting in quarter two, our Loved by Lovesac resale initiative has grown to cover 27 states altogether. This wider reach boosts customer lifetime value and opens up fresh revenue streams, while still backing our goal of offering items designed to endure and fit the way our customers live. At the same time, we've moved considerably closer to launching a formal trade-in offering. We expect to run an internal pilot for associates in quarter one of next year, and we aim to make the trade-in option available to customers beginning in quarter two. Maybe even more significant, we're thrilled to report that November saw the debut of wave one of improved delivery and assembly offerings. For a reasonable fee, customers may now book delivery that includes placement in their Room of Choice. Beyond that, we're currently trialing wave two, which brings white-glove services including in-home assembly. Our hope is that these offerings make purchasing Lovesac products — and loving them for many years — simpler for every customer. Our growth enablers are essential to maintaining profitable growth over the long term, and our supply chain sits at the center of that. As I've mentioned previously, our supply chain represents a competitive edge and a genuine strength. Today I want to zero in on how we intend to produce the majority of our goods domestically over the medium term. To begin, we're set to kick off US-based manufacturing of Sactionals insert components next summer. Given how far we've come, we think we can achieve this at gross margins that are neutral — and possibly better than what we see today. How, you might wonder, are we pulling this off? During the last year, we've fully reworked the Sactionals chassis, blending in new materials so it's more durable and far easier to automate. Competitors with narrow SKU ranges and tactics that would allow this simply don't exist directly, and that's precisely what opens up this chance for Lovesac. The redesign brought about a set of improvements boosting comfort, functionality, and simplicity of assembly — each genuinely valuable to our customers. These changes also give us a way to create new defensible patterns and IP that help keep rivals at bay. Naturally, the updated Sactionals will work with older products as well as with inventions we're busy developing now. We have 3 outstanding manufacturing partners who aim to serve distinct regions across the United States, which should deliver distribution efficiency. The more skilled we become at producing goods nearer to our customers and thus shipping them shorter distances, the more we ought to cut the weeks of stock we must hold along with transportation expenses; we're deeply thankful to our teams for their tremendous effort on this push. Making products domestically through automated, efficient methods has been a Lovesac ambition for a long while, and watching it near reality is truly thrilling. Achieving it in a way that pays off economically is even sweeter. Having said that, I'll now turn things over to Keith, who can give you additional detail regarding how we performed financially and what we expect going forward. Keith?

Thank you, Mary. We'll move straight into a brief look at the third quarter, and then we'll cover what we expect for the remainder of fiscal 2026. Before we get into the performance metrics, I want to point out that whenever we mention the third quarter, we mean fiscal 2026, unless we say otherwise. In the third quarter, net sales rose by $0.3 million, which works out to 0.2%, reaching $150.2 million, compared with the same period a year earlier. Showroom net sales climbed $11.7 million, or 12.8%, hitting $102.7 million in the third quarter versus the prior year period, and that came from adding 17 net new showrooms, though it was partly offset by a 1.2% drop in omnichannel comparable net sales. Internet net sales fell $7.6 million, or 16.9%, down to $37.3 million in the third quarter compared with the prior year period. Other net sales, which cover pop-up shop sales, shop-in-shop sales, open box inventory transactions, and the Loved by Lovesac program, declined $3.8 million, or 27.3%, to $10.2 million in the third quarter versus the prior year period. That decline was mainly because the company chose not to take part in any barter transactions this period, along with the shutting down of the company's Best Buy shop-in-shop locations following the end of our partnership with Best Buy. Looking at product category in the third quarter, Sactionals net sales were down 1.0%, Sacs net sales fell 9.0%, and our other net sales, which take in our new Snugg platform, decorative pillows, blankets, and accessories, rose 126.3% compared with the prior year. Gross margin dropped 240 basis points, landing at 56.1% of net sales in the third quarter of fiscal 2026, against 58.5% in the prior year period. The main drivers were a 320 basis point rise in inbound transportation and tariff costs and a 20 basis point rise in outbound transportation and warehousing costs, partly offset by a 100 basis point gain in product margin from price increases, cost reduction initiatives, and concessions from our vendors in response to shifts in the tariff environment. SG&A expenses, measured as a percent of net sales, came in at 49.9% in the third quarter of fiscal 2026, compared with 47.9% in the prior year period. That higher percentage stems mainly from greater payroll costs, license and registration fees, rent, and other overhead costs. The rise in selling, general, and administrative expense dollars was primarily tied to increases of $4.1 million in payroll, which includes an out-of-period $1.6 million expense tied to employee benefits in prior periods, $1.0 million in licenses and registration, $0.7 million in rent, and $0.8 million in other overhead costs. Those increases were partly offset by reductions of $3.0 million in legal and professional fees and $0.4 million in equity-based compensation. Rent went up by $0.7 million, driven by a $0.8 million increase in rent expense from our net addition of 17 showrooms, partly offset by a $0.1 million decrease in percentage rent. We estimate that non-recurring incremental fees tied to the restatement of prior period financials came to roughly $1.2 million in the third quarter. On the advertising and marketing side, those costs rose by $1.1 million, which works out to 5.7%, bringing them to $21.1 million in the third quarter versus the same period a year ago. As a share of net sales, advertising and marketing came in at 14.0% during the third quarter, up against 13.3% in the comparable prior year stretch. Our operating loss for the quarter landed at $15.8 million, versus $7.7 million in last year's third quarter, and that was caused by the same items we just walked through. Ahead of moving on to net loss, net loss per common share, and adjusted EBITDA, I'd ask you to look at the terminology and the reconciliation between each adjusted metric and its most directly comparable GAAP figure, all of which appear in the earnings release we put out earlier this morning. Net loss for the quarter came to $10.6 million, or -$0.72 per common share, against a net loss of $4.9 million, or $0.32 per common share, in the prior year period. In the third quarter, we booked an income tax benefit of $5.0 million, compared with $2.1 million a year earlier. Adjusted EBITDA loss for the quarter was $6.0 million, whereas the prior year period saw adjusted EBITDA of $2.7 million. Now to our balance sheet: we closed the third quarter in a healthy position, giving Lovesac substantial flexibility to put money into growth and thereby strengthen long-term value creation for shareholders. We posted $23.7 million in cash and cash equivalents, kept $36 million in committed availability, and carried no borrowings on the credit facility we recently amended. First, we're feeling quite positive about the quality and the quantity of our inventory, along with our capacity to hold industry-leading in-stock positions and delivery times, and we believe we can finish fiscal 2026 with inventory dollars meaningfully below where they stood at the close of fiscal 2025. Second, our approach to deploying excess capital opportunistically, centered on long-term value creation and better returns on capital, has not changed at all. Because of considerable uncertainty and the macro backdrop tied to tariffs and consumer spending in the near term, we bought back no shares of our common stock in the third quarter. On a year-to-date basis, we have repurchased 6.0 million of our common stock outstanding, and roughly 14.1 million remains available under our existing share repurchase authorization. For additional details on our third quarter financial performance, please see our earnings press release; and now, our outlook. As Shawn noted, category trends showed very modest improvement in the fiscal third quarter, and our present fourth quarter outlook resembles a negative low to mid-single-digit category decline. Though the demand growth we delivered through the key holiday period is very encouraging, we remain mindful of our tougher compares across New Year's and January, as well as the absence of any sustained week-to-week trend in consumer spending in recent months. One thing stays clear: the consumer is price-sensitive and deal-focused, and we have increased our discount plans to be more competitive, especially for the below $6,000 transaction. Taken together with our cautious view on sales through the rest of the quarter, this adds a bit more pressure on gross margin compared with what we had initially expected for the fourth quarter. To be specific, for the entire year, we project net sales between $685 million and $705 million. Our adjusted EBITDA outlook is $37 million to $43 million; that figure assumes gross margins of 56%-57%, advertising and marketing at roughly 12.5% of net sales, and SG&A at about 40%-41% of net sales. Net income is projected in the $2 million to $8 million range. Diluted income per common share is estimated at $0.15-$0.49, with roughly 16.2 million estimated diluted weighted average shares outstanding; turning to the fourth quarter, we project net sales of $236 million-$256 million, which reflects low single-digit revenue growth at the midpoint and fully captures every one of our near-term plans for tariff mitigation; adjusted EBITDA is expected between $51 million and $56 million. That includes gross margins of 57.5%-58.5%, advertising and marketing at 10% of net sales, and SG&A of 27.5%-28.5% of net sales. Net income is estimated at $30 million-$36 million. Diluted income per common share is estimated at $1.88-$2.22, with 16.2 million diluted weighted average shares outstanding; no full year fiscal 2027 guidance is being provided today; that said, to build on something Shawn mentioned earlier, as part of our plan to win the living room by igniting the core across the next several quarters, we intend to slow net showroom expansion to about 10 net openings in fiscal 2027. To sum up, we're balancing prudence and efficiency alongside our conviction that remaining focused on the big picture is essential. That is the enormous long-term opportunity for tremendous value creation for all Lovesac stakeholders. We're growing the Lovesac brand and putting investment into new product innovation spanning style, function, and new categories, which underpins a powerful multi-year secular growth outlook with macro upside exposure, as I see the case. With that, I'll hand it over to you, Operator.

Excellent, thank you. I've got two items for you—a main one and a follow-up—and I hope things go well as you handle a tough market. Regarding the Loved by Lovesac re-commerce program, could you share what savings the customer receives? In other words, how much less do they pay compared with purchasing the item completely new? And after that, what gross margin does Lovesac earn on that re-commerce transaction?

Hi, Tom. Good morning, and thanks for asking. Sure, so with Loved by Lovesac, our pricing approach gives roughly a 20%-25% markdown relative to what you would normally get if you purchased at full price or with some discount; for Loved by Lovesac we have two grades, meaning essentially practically new, and then good, when it comes to condition. That means pricing comes in two separate tiers. And from our standpoint, as we're gradually expanding it, we're in 27 states now, and we're genuinely beginning to observe enthusiasm growing. Our customers clearly understand that what we make endures a lifetime. The other element that has us excited is that launching this resale portion was really about establishing the workflows so that we can introduce trade-in during the next year, since we think that will prove extremely compelling when people wish to swap covers, adopt certain new innovations like a recliner, and similar things. So we're eager to tell you more about that, Tom, in the coming year.

Let me just tack on one more point: what we've mostly focused on during this year is standing up the plumbing and the skill sets needed so the program could reach a wide group of people, plus checking each of its components to make sure everything works as it should. At this point we're operating across 27 states, and a handful more are on the way, yet armed with what we've learned, we'll be in a position to push hard on this initiative and grow it. There are additional ideas we're evaluating that could propel this part of our business still further and leave us well placed to push significant volume through it, particularly with the trade-in program about to launch on top of everything else.

I believe Tom never got his chance at a follow-up, but no matter—let me go ahead and ask. I realize you aren't providing guidance for next year, yet there are quite a few shifts for fiscal 2027 compared with what we'd assumed before. The rollout of the new room is being delayed. Showroom count is being reduced, yet a new sofa is coming; it sounds like you'll lean a bit more on promotions. Could you walk us through some of the P&L effects we ought to anticipate next year—how all of that plays into sales, costs, margins, and so on? More domestic manufacturing as well. Again, plenty of changes for next year. Please give us some help.

I'll start us off, then hand it to Sean for a bit more of the qualitative color. Mike, those are completely fair questions. Right now we're in the middle of closing out the fourth quarter and wrapping up this fiscal year, and we're also working through our formal AOP planning for fiscal 2027. Give us a couple of months, and we'll share far more detail. As both Shawn and Mary said earlier, we're quite happy with the early progress—what we've observed from these adjustments during the fourth quarter—but we need a bit more time. Shawn will cover some of the qualitative points, but the core principle here, I think, is our belief that through an extended stretch of macro uncertainty, by concentrating on harvesting the brand, we can earn more from the infrastructure and products already in place, and from bringing out new products that reach the market quickly and cost less to introduce because they sit close to our existing estate. To us, that looks like the more sensible path, and as Shawn noted, it also buys us additional time to shift into a big splash for the new room when it launches in early calendar 2027 in a meaningful way, so that awareness and appreciation are driven right from the start—but Shawn, what else would you like to add?

Yes, thanks. Because of the traction we've had with Snugg along with the brand refresh — and our marketing group is genuinely finding its footing amid all the transformation we've undergone during the last several months, where we're now truly observing green shoots — we can see a route toward establishing a stronger financial picture and cash position ahead of that new room's debut, which is the sort of situation we want to occupy when we plan to take a big swing and introduce it with tremendous enthusiasm. So in practice it amounts to moving things by just a handful of months, along with this new sectional sofa platform we're so eager to show everyone. Perhaps when we talk again, it'll be a product that addresses a gap — one distinct from the gap Snugg has already started addressing since its introduction — and there's additional news coming on the Snugg platform too. So, as Keith mentioned, it's a means of generating greater profitability and strength within our core business while we get ready for that new launch; and honestly we're very appreciative of the results from Snugg, plus the marketing engine that has been delivering strongly lately through some fresh tactics, which gives us substantial confidence that this is the correct approach for the company across the near to medium term.

Understood. May I pose a follow-up? I get wanting to stay conservative regarding the Q4 forecast, yet the sector appears to be in better shape than before. You're witnessing plenty of positive movement, a solid Black Friday, and so on. I realize comparisons get harder, but you were aware of that already. So what explains the reduced Q4 forecast now compared with what your guidance from three months back suggested? Once more, if the sector appears to be improving and you've got some positive movement, is it that the sector's improvement isn't quite as good — better, yet not exactly what you'd anticipated? I'm just attempting to reconcile that.

Yes. Well, the sector contains many distinct segments, and certainly a few would argue it's improving somewhat. Yet at the premium tier, which is truly where our competition lies, conditions are worse than the sector overall; thus it's uneven. It's disorderly. And listen, we did experience a really solid Black Friday stretching through Cyber Monday, a record Cyber Monday for our company; it's an abundance of caution. We face a challenging comparison as the new year arrives. Returning to the sector, during November, it declined 3%, yet the premium tier fell 11%, simply to illustrate that clearly for you, correct? So that's the environment in which we're functioning. And from an abundance of caution, aware that challenging comparisons exist, especially across New Year, we simply wish to stay conservative. We absolutely acknowledge a very minor shortfall for the quarter, and that's incredibly maddening for a team that takes pride in delivering and fulfilling expectations; so that's the situation for us at this moment.

That's reasonable. I appreciate it.

Excellent. Thank you for fielding my questions. To start, I was hoping you might give us a little extra detail regarding what's driving the softer revenue during the quarter. You brought up softness in items priced below $6,000. I was just curious whether you could elaborate on that a little further. Is it mainly Sacs, or is it the smaller pieces of the Sactionals? And does this tend to hit internet sales harder than showroom? If you might just shed a little more light on where exactly that revenue softness originates, that would be useful. Thanks.

Yes. Hey, good morning, Eric. Thanks for asking. Yeah. So what we've clearly observed — and I believe Shawn mentioned this earlier — are the changes we implemented as we moved out of Q3 and into Q4. So we're seeing a substantial improvement in the lower-end transaction sizes, which are mostly the small configuration Sactionals. So a major rebound from, obviously, the drop and the difficulty we dealt with in quarter three. I think the second element is that at the high end we keep witnessing this premiumization that's truly pushing a higher AOV, so customers are purchasing additional recliners, additional add-ons when it comes to storage, and even more premium options with regard to fabrics too, and then I think the final element, and I believe I mentioned this earlier, is that Heidi has been spearheading a great deal of transformation within the marketing team, which includes bringing new leaders on board and in two areas, one being the websites, and they've been putting in an enormous amount of effort, really reworking the configuration experience so we can genuinely generate far better enthusiasm around the holiday gift guide, and the web is achieving a considerably higher growth rate compared to the total company in quarter four, so you're witnessing a lot of that upside coming through; then I think Shawn spoke about certain new innovations, whether that's PillowSac Chair Jr, Accent Chair, and the Swept Arm plus assorted other items. That's likewise assisting in bringing additional energy to our growth. We're going to keep being able to propel our platforms through innovation and excitement. We've brought in some fantastic new covers, for instance, and the new colors are on fire. As we keep generating that excitement and then clearly get the website to be able to bring in customers at a quicker pace since it is our most efficient store, that's really what we've witnessed as the strength through December for this quarter.

Okay, that's useful. I appreciate the detail. Now, a quick follow-up from my side. Regarding this marketing revamp, can you give us some idea of the timeframe you anticipate for it, and how long you think we'll need to wait before seeing results? You're probably already seeing certain effects in digital, but I'm curious what other schedules you have in mind, and what we ought to have in mind too, when it comes to this marketing change and whether it ultimately succeeds. Thanks.

Yes, thank you, Eric. I see it as having two parts. The first is immediate and near-term. It's taking place as we speak; as we discussed regarding moving away from conventional media formats even more forcefully than we ever have, for example linear TV, redirecting far more toward heavily paid influencers — we did plenty of that late in quarter three and into quarter four — and much more around programmatic digital channels. All of that is immediate. It's occurring at this moment, and we attribute the quarter four performance to a great extent to those changes. So that has genuinely been underway in real time. Beyond that, as I mentioned regarding website performance, that was really shifting within hours and days as the team pivoted and implemented some of those tweaks. So all of that sits largely in Q4. The second horizon, as Shawn has discussed, is the brand evolution and really how we bring the brand to life through storytelling about the value and the versatility of the brand, and then how you descend into the platforms. You will keep seeing more from Heidi and the team as we move into quarter one and quarter two next year, as we truly strengthen that storytelling and truly stake out the territory that belongs uniquely to Lovesac and to nobody else, so you'll simply keep watching us pursue all of those opportunities, and then I think, Shawn, perhaps you'd like to speak about our emphasis on winning in the living room and especially Snugg's performance on e-commerce, which has been extremely strong.