The Lovesac Company (LOVE) Earnings Call Transcript & Summary

Thanks. Morning, everybody. Joining me today are Shawn Nelson, our Chief Executive Officer; Jack Krause, President and Chief Operating Officer; and Donna Dellomo, Chief Financial Officer. Ahead of diving in, I want to note that certain things we'll discuss contain forward-looking statements about upcoming events and how our finances will perform going forward. That covers statements on what we expect down the road, our financial projections, plus our plans and prospects. What actually happens could differ materially from what those statements describe. To understand 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 occur. Every forward-looking statement we're making on this call rests on assumptions and beliefs held as of today, and unless applicable law requires it, we take on no duty to update them. Today's discussion will also touch on non-GAAP financial measures, among them EBITDA and adjusted EBITDA; these non-GAAP measures ought to be viewed alongside our GAAP measures, not as a replacement for them or on their own. A reconciliation showing the most directly comparable GAAP financial measure against those non-GAAP financial measures appears as supplemental financial information in our press release; and now I'd like to hand the call over to Shawn Nelson, Chief Executive Officer of The Lovesac Company.

Thank you, Rachel. Hello, everyone, and I appreciate you being with us today. To start my comments, I'll give an overview of how the company has responded to the COVID-19 outbreak, and after that I'll summarize how we performed in the fourth quarter and fiscal 2020. Following me, Jack Krause, our President and COO, will go into more detail about the operational actions we've taken to steer through the current situation, and he'll describe how we're thinking about our main initiatives for this fiscal year. Donna Dellomo, our CFO, will then walk through our financial results along with a few additional items tied to our outlook in greater detail. When it comes to the coronavirus pandemic, the health and safety of every one of our associates and customers has been our #1 priority throughout this crisis. As we announced previously, on March 17, we moved quickly to temporarily shut every one of our retail showrooms and started functioning as a web-only direct-to-consumer operation. For the first 3 weeks of the shutdown, we continued paying all associates. After that, we reached the hard choice to let go of all 445 of our part-time associates, which equals 57% of our total company headcount, and we reduced pay by 20% at the top executive level, with graduated reductions across headquarters, and put numerous other cost-saving measures in place. Our stance is that almost every expense can be treated as variable right now, with cash preservation and generation as the priority so we strengthen our ability to make it through what may be a prolonged crisis. Year-to-date, our website has delivered very strong results despite the showroom closures. From when we closed showrooms on March 17 through April 12, e-commerce point-of-sale transaction dollars have risen over 400%, and total POS dollars are up 3.6% compared with the same period last year, which had included showroom sales. Fortunately, since our 3PL warehousing and distribution system holds a share of the grocery market, our distribution centers have stayed open and continue shipping Lovesac product in the regular course, even after many nonessential businesses in certain states were shut down. There are additional key characteristics unique to our company and business model that leave Lovesac well positioned to make it successfully through this COVID-19 pandemic. First, Lovesac had a strong balance sheet, with a net cash position of more than $40 million in cash and $10 million of availability under the line of credit, giving us total liquidity of $50 million when the COVID-19 pandemic driven showroom closures began. Second, we have a fully shippable product offering that is evergreen. Lovesac's patented Sactionals are essentially the only full-size sectional and sofa products that can reach the consumer's door through common carriers such as FedEx, and our giant beanbags called Sacs have become synonymous with the video gaming and movie binge watching lifestyles that are all about simply being comfortable at home. We see the reality of so many families stuck at home as part of the possible expansion in demand for our products going forward, compared with what we might otherwise expect in a tumultuous time like this. We've already witnessed huge increases in both of those, our main categories, during Q1 up to now this year, which shows up in the robust e-commerce results I mentioned earlier. The stock we hold of these items isn't tied to any season. It won't spoil, nor turn stale. So even though we'll tweak our inventory levels to match the forecast, swings in demand don't create any markdown risk for us. Third, we run a highly adaptable marketing budget, and we have no long-term ad contracts signed. When showrooms had to shut, we swiftly reworked every marketing spend and communication approach to push sales toward online channels, and the related results have been strong. Fourth, Lovesac operated with a nimble, lean model. In our compact showrooms, a standard staffing setup runs 5 to 7 associates, and usually just 2 of them work full time. After our showrooms closed and we subsequently let go of part-time staff, we rapidly shifted our whole force of full-time associates to back online sales through Facebook Live events, "backlog outreach," and podium technology interactions by text messaging — something proving highly effective at boosting online sales and likely surfacing new tactics we'll use even once showrooms reopen. The greater success of our online sales so far across this stretch, driven by these newly applied tactics, further bolsters our capacity to quickly expand Lovesac's share of a $30 billion U.S. upholstered furniture market, while in the end committing to as few physical showrooms as we can, which has always been our aim. We anticipate greater leverage when negotiating with landlords going forward. Fifth, and last, we keep diversifying sales channels for what's ahead. We're thrilled to share our new pilot with Best Buy as we broaden our channel reach past our thriving Costco partnership and Macy's pilot. Best Buy has already kept 3 Lovesac shop-in shops in market over the last 90 days as a test aimed at a bigger program. Although those are shut for now, we're quite happy with the results so far and eager to watch the program grow once retail broadly returns to normal operations. To us, the Best Buy partnership isn't merely one more sales channel — it stands for a key strategic alignment with our future product innovation work. On the whole, we've managed to adapt fast when faced with a crisis, and given all the reasons above, we believe Lovesac not only can successfully steer through this singular stretch of time, but thanks to our model's flexibility, we'll be positioned well to scale back up either gradually or quickly as conditions normalize. Jack will go over our coronavirus planning work, which falls into 3 key buckets: team health and safety; business strength; and financial resilience. We moved fast to rank and stack every potential initiative, weighing many different considerations, and then started executing right away—even a number of weeks ahead of the March 17 shutdown of retail showrooms; we're managing every part of the business aggressively in order to safeguard cash and keep our financial condition strong. We're cooperating with landlords so that whatever showrooms we may still decide to launch this year require as little cash outlay as possible; throughout the period when showrooms have been closed, we've collaborated closely with every one of our landlords on rent relief and we feel terrific about the partnership and the cooperation. On the whole, we're managing to offset a large portion of that significant expense line. Any travel and entertainment, every cost tied to training, bringing on new hires—which mattered a lot given how fast we were growing—over time, sponsorships, big-format meetings and plenty of other costs have either been put off with no set date or done away with. Marketing dollars have been reallocated toward growing our business online, centered on activities that produce measurable ROI; now for an update on supply chain. In response to the special tariffs on China, Lovesac's manufacturing supply chain has become far more diversified. Following short-lived interruptions while Asia dealt with the pandemic, activity had returned to full swing when our showrooms began closing in mid-March. Since China is now well beyond its own coronavirus shutdowns, we're encountering only minor delays affecting a handful of our stock covers. Our supply chain throughout Asia is more diversified at present than it has ever been and remains robust. Sactionals manufacturing is now distributed among Vietnam, Malaysia and China.

Our fabric milling takes place throughout Indonesia, Taiwan, India, and China. Our cut and sew work happens in Vietnam, India, China, America, and before long, Malaysia and Indonesia too. Our third-party custom order selling facility in Los Angeles shut down a few weeks back while California's shelter in place order was in effect, but web-based custom order cover sales have always been de minimis, so we don't anticipate any meaningful impact from that. Every Sac is still stuffed, shrunken, and shipped from our third-party manufacturing facility located in Texas, which was likewise permitted to stay open throughout the shutdown because certain of its other manufacturing activities were deemed more critical and necessary. At present, our supply chain has ample redundancy, and what we still manufacture in China now benefits from substantial negotiated discounts that mostly cancel out the special tariffs' effects. Everything we source from outside China arrives at a slightly lower cost than the first cost within China, even prior to factoring in the additional Chinese tariffs. Even though those favorable COGS begin to show up during the first quarter of this year, we still have a substantial amount of tariff-affected inventory in our warehouses, and it has to work its way through before it can affect the GAAP gross margins we report. With FedEx expenses climbing and other headwinds we already know about, we expect the gross margin rebound to bring us back to the mid-50s range quite gradually; in our estimation, it will take about 8 quarters to get all the way back to that mid-50s gross margin level. Even though it's great that we've expanded beyond China so quickly, we feel lucky that a number of those important steps were taken together with the Chinese factory owners we've worked with for years, who built facilities for us in Vietnam and Malaysia at their own cost. Relationships like these really matter in moments such as this, and our partners overseas, whom we've known a long time, have already given us 30 to 60 or more additional days on our payment terms. We believe they'll be ready to adjust with us as the company's needs change, exactly as they've done many times across our lengthy shared history. Now, briefly back to how we did in fiscal 2020. As the earnings release showed, we finished fiscal 2020 on a strong note. Lovesac hit a lot of operational milestones during 2020, and in fiscal 2021 we plan to keep building on that momentum. First, in FY '20 we added 16 net new showrooms, which works out to 21% year-over-year growth, reflecting our emphasis on expanding the omnichannel Lovesac brand and boosting marketing spend alongside a growing showroom footprint. A key point is that the returns we're seeing on showroom investment keep getting better, with the payback period for new showroom investments now down to 13 months, compared with 16 months previously. Second, we grew our CapEx-light pop-up shop and shop-in shop footprint, opening 4 Macy's pilot shop-in shops, and those have done very well up to this point. Throughout the year, we ran 756 pop-up shop events at Costco, each lasting 10 days, compared to 553 such events the previous year. Third, we boosted what we spend on marketing across digital channels, adding traditional spending too, such as TV, and we gained valuable insights from our test-and-learn efforts. Fourth, we keep reinforcing our moat along with the intrinsic Designed for Life attraction of what we sell, thanks to launching the Power Hub and Storage Seat, and we closed out the year with a robust 45% attachment rate plus a related $150 lift in AOV on Sactionals stemming from those launches. Fifth, during fiscal 2020 we placed significant bets throughout our company. Among the most notable were investments in supply chain, systems and processes, along with key hires of talented people, since we concentrated on building a sturdy base to underpin the considerable expansion that awaits Lovesac; and sixth, when it comes to sustainability, we kept using solely yarn spun from 100% recycled plastic water bottles, keeping 28 million bottles out of the waste stream during fiscal 2020 by itself for our Sactionals upholstery fabric. In addition, we started employing REPREVE recycled yarn across numerous decorative covers over the past year. Thus, to sum up, fiscal 2020 brought many accomplishments for Lovesac, and we achieved meaningful progress in setting ourselves up to keep disrupting the $30 billion couches, chairs and seating category. When COVID-19 hit, we moved fast to focus on conserving cash and keeping our finances strong during this tough period, and at the same time we made sure to keep moving forward with innovation and stay ready to resume our growth and regain market share as soon as conditions permit. Finally, I want to thank everyone on our team for their incredible hard work and commitment. Every Lovesac employee has given something up personally and has put in enormous effort to come together and drive our business ahead successfully through these challenging days. Having said that, I'll hand the call to Jack for further specifics about our strategies to steer through the present climate, the highlights of FY '20 and our recovery plans for FY '21.

Thanks, Shawn, and good morning to all of you. Fiscal 2020 wrapped up with a solid fourth quarter, and we made meaningful operational headway on the things that matter most to us. I want to start by going into more detail about how we're steering the business through the changing COVID-19 pandemic, then touch briefly on how we've done against our strategic priorities for the year that ended in FY '20, along with what we have planned for the next financial year, '21. To start with our COVID-19 plan: we've put a crisis management process and team in place so that decisions can be made quickly and systematically; we've set up cross-functional teams spanning 3 main pillars: first, team health and safety; second, business strength; and third, financial resilience. Let me take team health and safety first. We acted on quite a few things very fast once we became aware of COVID-19. As we've said before, every showroom was shut down on March 17, and all full-time and part-time associates received pay for their scheduled hours through April 5. Those of us at headquarters are working from home until we say otherwise. Information has been flowing down to the whole team every day, through an online resource center for employees that gets refreshed regularly, plus special bulletins from HR and from the leadership team. That team is now putting together this strategy and cadence so showrooms can reopen safely when the timing is right; when it comes to business strength, we've been pursuing a variety of initiatives to adapt and make the most of our resources. One important pivot: our full-time showroom associates have stayed engaged with customers through Podium, a chat technology that lets our associates guide customers through the buying process while working remotely from home; with this technology, essentially all of our associates can serve as remote-based selling and customer service agents throughout the entire country. Just in the last 2 weeks, our associates have taken part in thousands of chats with customers and have given product demonstrations on Facebook that have drawn over 100,000 views. We're happy to report that during this period, the full-time showroom associates have brought in revenue well beyond what's needed to cover their payroll; we'll keep refining and growing this approach as we test and learn new ways to best help our associates serve customers within our omnichannel model. Our communication has increasingly centered on Lovesac value-added services, such as free shipping returns and the risk-free trial periods we always offer, along with greater availability of swatches, which help customers feel more at ease buying furniture without physically experiencing it; that matters more and more, especially in the environment we find ourselves in now. Overall social media usage has surged because of the COVID-19 crisis across platforms like Facebook, Instagram and Pinterest, to name a few. Because of that, we've shifted our spends and messaging to match; we're happy with how much more efficient Lovesac's Pinterest and Facebook campaigns have become over the past month. Improved audience segmentation, better creative, optimized platforms, plus automated bidding and a reworked targeting structure centered on our key audiences have all fueled this. We're also using direct-to-customer approaches, like live product demos held several times weekly on our Facebook page to help people at home, along with the greater swatch availability I brought up earlier. It's very encouraging that these moves are significantly boosting our capacity to generate sales even without showrooms. Between March 17, when our showrooms shut, and April 12, our e-commerce POS transaction dollars rose more than 400%, while total company POS dollars climbed 3.6%. Last week also demonstrated our ability to pull off high-volume events when no showrooms exist. Our Easter Flash event generated $6.7 million in total company POS dollars — that's actually 7% comps above the prior year's Easter event, with product margins only 60 basis points under last year. These outcomes give us confidence that we can keep pivoting and steer successfully through this difficult climate. With this recent success and the cost savings measures Donna will detail further, we think we can run for the rest of the year without showrooms on a cash-neutral basis. Donna will cover the third pillar of financial resilience shortly. Now to our fiscal 2020 operational progress. Shawn talked about product innovation. The Storage Seat and Power Hub launches succeeding shows how powerful our platform approach to product innovation is, and we're eager to build on that momentum ahead. With brand awareness at just 1% and ROIs in our marketing activities strong and rising, we kept leaning into marketing over this past year. Our customer lifetime value, or CLV, reached a record $1,835 in fiscal 2020, rising from $1,540 in fiscal 2019. As anticipated, in fiscal 2020 our customer acquisition cost, or CAC, grew to roughly $390 from $309 the year before, since we boosted marketing to build brand awareness via TV, digital and social efforts. For the year, we raised marketing expenditures versus the prior year by almost 59% to $29.2 million, and our CLV to CAC ratio ended the year at 4.7x, down from 5.0x a year earlier, proving our spend remains effective even while we scale dramatically. Importantly, we keep growing our targeting and segmentation work to boost relevancy, and in Q4 we brought dynamic video into our digital ads and a virtual demo on our website to further enhance the digital shopping experience. Next, showroom openings. Sales per square foot across our showrooms hit an all-time high this year at $2,083, up 22% from last year. Our new showroom productivity remains excellent, with our 2019 class delivering a payback of 20 months at the 4-wall contribution level. That kind of productivity keeps giving us flexibility in how we approach locations and leases. Our growth plan relies heavily on showrooms, which act as strong brand boosters and deliver excellent returns. Having said that, the COVID-19 pandemic's related events affected our plans for new showrooms during fiscal 2021. Once circumstances permit, we'll bring currently existing showrooms back into operation and pick our expansion of showrooms back up. Worth noting is that our showrooms achieve very high productivity while needing only a small amount of labor to run, because we handle no merchandising assortments, no slow-moving inventory, and no inbound deliveries of the kind a standard store model involves. Turning to pop-up and shop-in-shop growth during fiscal 2020: we kicked off a pilot involving our 4 permanent Macy's shop-in-shop spots in L.A., Atlanta, New York City and Long Island, and their results make us quite happy. Beyond that, we're delighted to share that during the fourth quarter we launched 3 pilot sites with Best Buy: Mount Laurel, New Jersey; Plymouth Meeting, Pennsylvania; and Tuttle Crossing, all of which began extremely well. Through this shop-in-shop model, we keep gaining exposure to new customers in a way that uses capital efficiently, and it lets customers view, touch and feel our product prior to buying. The fact that these pilots launched successfully gives us confidence that this model can grow our footprint very efficiently. Our pop-up shops alongside Costco kept delivering strong results in fiscal 2020; we ran 756 pop-up shops together with 4 online roadshows; through these Costco sites, our other channel sales rose substantially, reaching $29.6 million compared with $19.7 million in fiscal 2019. For the year, pop-up shop productivity rose 8%. During fiscal 2021, the moment circumstances allow, we anticipate carrying on with our Costco pop-up shop sites and likewise continuing to investigate the shop-in-shop model alongside other retailers, in light of the encouraging results seen so far. Shawn gave an update regarding our supply chain progress. As he mentioned for fiscal 2020, we broadened our sourcing while putting money into distribution infrastructure over the past year. We grew our distribution capacity by obtaining several warehouses and extra processing labor, enhanced how reliably our suppliers delivered orders as planned, made our shipments to customers more accurate, and strengthened system integration across supply chain, our carriers and our 3 PL distribution centers. So on the whole, we achieved solid operational progress in fiscal 2020. Looking forward, we'll stay disciplined on expenses and capital, concentrating on protecting our financial health amid the current environment, while readying the company to ramp up swiftly and efficiently once circumstances allow. With that, I'll hand the call to Donna so she can go over our Q4 and full year financials and give a brief summary of the financial resilience team work so far.

Thanks, Jack, and good morning to all of you. I'd like to kick off my comments by walking through what happened in the fourth quarter, and after that I'll lay out the framework for how we're thinking about fiscal 2021. Net sales rose 43.6% to $92.2 million, and that gain came from a broad base, fueled by solid results in every channel — new showrooms and comp showrooms, e-commerce, and our other channel, which covers pop-up shop and shop-in shop sales. Our digital marketing strategies worked well, lifting both ticket and transactions, and we also recorded growth in new customer count along with repeat purchases. For specifics on comparable sales performance and the opening of new showrooms, please see our press release. Turning to fourth quarter results by channel: showroom sales climbed 31.9% to $57.3 million, e-commerce sales rose 73.9% to $26.5 million, and our other channel — made up of pop-up shops in Costco locations plus shop-in shops in 4 Macy's pilot locations — grew 53.1% to $8.4 million. On the product side, Sactional sales were up 73%, Sac sales fell 16.4% because our national advertising emphasis was on Sactionals, and sales in our other category, which includes decorative pillows, blankets and other accessories, declined 5.1%. Gross margin dropped 630 basis points as expected, mainly because of a 460-point tariff impact headwind plus more flash sale promotions, partly offset by lower cost on our Sactional products. Keep in mind that the timing of our tariff mitigation efforts and higher shipping costs is creating this temporary gross margin pressure, as Shawn noted. We anticipate roughly an 8-quarter recovery back to normalized gross margin levels in the mid-50% range. SG&A dollars, excluding onetime items, rose mostly because of greater infrastructure improvements, selling related expenses and stock compensation expense, while the SG&A rate improved 320 basis points year-on-year thanks to leverage from the 43.6% net sales increase. Advertising and marketing investments, which pay off over extended periods, were up $5.3 million, or approximately 330 basis points, to 11.4% of sales, mostly from introducing additional media around the holiday season. Depreciation and amortization rose $900,000 versus the prior year to $1.5 million, principally tied to capital investments for new and remodeled showrooms and infrastructure investments. In the fourth quarter of fiscal 2020, operating income saw no adjustments and came in at $5.4 million, versus operating income and adjusted operating income of $8.2 million and $8.3 million, respectively, in last year's fourth quarter. Net interest income for the fourth quarter was $109,000, reflecting the impact of our IPO and other primary share financing. Tax expense in the fourth quarter of fiscal 2020 and 2019 was not material and was related to minimum state income tax liabilities. Prior to shifting our focus to net income, net income per share, and EBITDA, I want to note that when I discuss these metrics, I'll be referring to net income and net income per share on an adjusted basis—meaning they exclude IPO and other financing costs—along with adjusted EBITDA. For definitions of these terms and a reconciliation of each adjusted metric to its closest GAAP counterpart, please see the earnings release we put out earlier today. In Q4 of fiscal 2020, adjusted net income came to $5.4 million, or $0.37 per share, versus $8.5 million, or $0.63 per share, in Q4 of fiscal 2019. Adjusted EBITDA stood at $8 million, compared with $10 million during last year's fourth quarter. If you'd like more specifics on our full year income statement, that's available in our earnings press release. Now let's look at the balance sheet. Liquidity continues to be solid. We closed out the year with $48 million in cash and cash equivalents, plus $12.5 million available on our revolving line of credit, and nothing drawn on that revolver. Inventory at year end rose 39% from a year earlier, fueled by stronger sales, more capitalized freight and warehousing costs tied to tariffs, higher inventory levels, and greater investment in weeks of supply on hand. Free cash flow—which we define as cash from operations minus CapEx—was a use of $21.7 million during fiscal 2020, against a use of $17.8 million the year before, and that change was mainly due to roughly $5.7 million in net tariff impact during fiscal 2020. On the outlook front, because of uncertainty about how long COVID-19 disruption will last and how it will evolve, we aren't giving guidance for fiscal '21 at this time. As Jack and Shawn noted, we're happy with how strong e-com has performed; quarter-to-date total POS transaction dollars through April 12 are up 30.8% as a result. Once showrooms closed, total POS transaction dollars through April 12 rose 3.6% compared with the same period a year ago; we're managing costs and cash outlays aggressively in line with current trends while making sure we're ready to restart full operations whenever conditions allow. In keeping with past practice, fixed costs like payroll are coming down quickly, while occupancy and other expenses are being postponed. Every variable expense is being adjusted to match current sales trends. As of yesterday, April 15, our quarter-to-date cash burn is roughly $14 million, compared with a $10 million burn rate in Q1 of last year. Q1 is typically a quarter when we burn cash. And although we've moved quickly on the cost side in reaction to COVID-19 disruption, those actions aren't yet showing up in this burn rate; we'd anticipate being approximately cash flow breakeven over the remaining few weeks of Q1, finishing the quarter with a cash balance near $35 million and full availability on our revolver. Just to remind everyone, there aren't any financial covenants attached to our revolver besides the obligation to keep $1 million in excess availability. CapEx this year is variable as well, and since the bulk of what we spend on CapEx goes toward new showrooms, the delays there really affected our CapEx spending. Our plan for opening new showrooms this year could land anywhere between 0 and 18, depending on when those showrooms reopen. Excluding new and remodeled showrooms, CapEx spending will fall in the $3 million to $4 million range this year; we do anticipate generating cash from working capital this year by way of inventory reductions and extended payment terms approved by vendors. Given the steps we're taking, the strength coming from our e-commerce business, our cash position and revolver availability, the fact that most of our costs are variable, and our debt-free balance sheet, we're confident we have enough liquidity and financial flexibility to get through this period even if showroom closures last for an extended stretch. For any other details about our results, please see our earnings press release. With that, we'd like to hand the call back to the operator, who can open it up for questions. Operator?

Nice work steering things so effectively through such a tough stretch.

I appreciate that — it has certainly been quite a ride.

My first question — I believe both of you brought up, at least somewhat, how sales have been trending lately. If I understand those figures right, it suggests the big jump in online revenue is doing more than covering what we're losing from shuttered locations. So there are 2 pieces here. First, could you break down in a bit more depth what the specific elements look like and how this is functioning, especially on the digital side and then in the channel involving your partners such as Costco? Second, how ought we to view — and I realize you aren't providing guidance right now, which makes sense; but how ought we to view whether this can last? Given the notion that, to some degree, those sales now boosting online might have gotten a lift from a showroom that opened a few weeks back. Yet as we move deeper into this stretch without any showrooms, might that end up affecting online sales?

Thanks, Brian. I'll take that one, and then Shawn and Donna, if you two have anything further to say, please jump in. It's quite thrilling, clearly, to witness that during the Easter week, we posted a comp over shifted Easter of plus 7% with zero showrooms open, and that came from a mix of factors. First, there was a substantial rise in our — activity involving showroom associates operating from home, running chats and also doing those video Facebook demonstrations we discussed. Of the dollars they brought in, which exceeded $1 million during the past week by a wide margin, about 80% came from new quotes built via online interactions and discussions; so what we're discovering is that associates working from home are in fact turning into an extremely strong instrument for fueling the online business; and then to frame it properly as we pivoted — and clearly, I'm handing you fresh information since by the time we reach next week, it will no longer be current. But across the last 3 weeks, the business has essentially moved from 60% of the original budget we had with every showroom open to 70% to what we think might reach nearly 100% within the next couple of weeks. So we're witnessing a dramatic change in how we can bring in customers. Clearly, the other development is that there's been a dramatic shift in how we market; we've stepped back from traditional TV, leaning more toward digital marketing and putting significantly greater effort into social, which is delivering genuinely strong results for us. Another thing occurring in the broader marketplace is that CPC costs are falling sharply in the marketplace owing to reduced demand and advertising. What we're seeing is that because we have flexibility and because we've shifted toward e-commerce, we can actually capitalize on this. And we're seeing that our marketing ROIs appear to be just as strong as they ever were when every one of our showrooms was open. So I'm starting to feel quite confident that even in a worst-case scenario, where our showrooms stay closed for an extended period, we can still run at a level that represents growth over last year for the whole company, and do it in an extremely efficient manner.

Brian, glad that was useful. Now for my second question — maybe an easier one about figures. When we consider how cash moves through the business, you mentioned during your prepared remarks that you're essentially steering toward cash neutral, which is, once again, pretty remarkable. How should we frame what the business needs in terms of inventory? You entered this year carrying somewhat heavy inventory. Shawn, you noted often that there's minimal risk here, and I share that view — the inventory carries very little risk. Still, how much of it could you perhaps draw down to generate cash while keeping operations running?

Albert, generally speaking, our vendor relationships are excellent, and Shawn clearly has built incredible ties spanning more than 15 years; so I believe they've granted us a tremendous capacity to adjust, and they've been quite forthcoming in conversations regarding our need to be flexible as we head toward a recovery phase, plus flexibility around payment terms. I'll let Shawn and Donna fill in anything further.

Yes. I would just...

Yes...

Go ahead, Donna.

Go ahead, Shawn.

All right. To build on what was just said, I'd simply note that inventory is something we consider a core asset of this company, in the same way we think about cash. Having the right stock positions lets us adapt, as Jack mentioned, since when we headed into shutting those 91 showrooms, we truly had no idea how the business would respond. The very last thing we wanted was to find ourselves short on inventory. So at present, we're pleased with where those levels sit, and we plan to run them extremely tightly and watch them closely. We also plan to capitalize on the payment terms our overseas suppliers have customarily given us, which puts us in a spot where, first, we can eventually come out of this contraction, so to speak, with considerable speed, or so we hope. Second, as you pointed out, we regard it as a form of protection against any additional turbulence, since we can convert it — and we've demonstrated our capacity to convert that inventory into cash. So on the cash portion of this, Donna, I'm not sure what you'd want to add?

Right. One more thing I'd mention is that when it comes to buying inventory, we only lock ourselves in roughly 90 days ahead. As Shawn was saying about our suppliers, even though we share that longer-term projection, what we're actually on the hook for is 90 days out, and our vendors are extremely accommodating. Over the past 2 years or so, we've managed to accumulate some solid safety stock, and that gives us somewhere in the range of 12 to 16 weeks of what you'd call extra inventory. So with inventory purchases representing our biggest cash outlay each year, we have quite a bit of room to maneuver. Should it become necessary, we can pull back on those orders considerably, and doing so wouldn't put our stock levels at risk of being too low once we're in a position to scale the business back up and reopen the showroom. So all in all, I'd say our inventory situation is quite strong, and our vendor relationships are excellent too.

Alright, here's another point worth mentioning, something that's developed quite recently and becomes clearer when you step back and look at it — Shawn has brought this up on numerous occasions — essentially, our inventory never goes out of style. We operate a core inventory operation, so compared with certain other businesses, we enjoy a massive edge because there's no need to stress over the fate of spring inventory throughout this stretch. We already know its destination: it becomes fall inventory. Another crucial point I want to make is that with this enormous move toward e-commerce, that channel has essentially matched the overall company mix — the same way the business was doing beforehand. Going in, one worry we had was whether we'd witness big mix shifts away from Sactionals, our key platform. That hasn't happened in the slightest. As a matter of fact, Sactionals have shot up dramatically online, clearly through e-commerce, so we're now in a situation where the mixes we observe resemble what you'd have planned from the start. Plus, our inventory will hold up for quite a while. So that too strikes us as a dependable advantage.

Excellent. There's something I want to ask, plus a follow-up, after which I'll rejoin the line for more questions. So to start: what should we make of the room you have to maneuver when it comes to your showroom properties? Like, once we're past all this, say — could you exit leases if you decided to relocate, in a scenario where certain malls and power centers end up in stronger positions afterward, based on which other tenants they've got?

Yeah. Tom, I believe — let me take that one first, and then if anyone else wants to jump in. A few points. First, we're incredibly lucky that every showroom we currently operate sits in an A mall or above, or in excellent off-mall spots. And as you're aware, at more than $2,200 per square foot in productivity, every one of them performs extraordinarily well; that said, we've consistently viewed market penetration through the lens of combining customer acquisition costs with customer lifetime value. And I think what this situation really reveals about where things are headed is that investing in showrooms that rely on foot traffic simply isn't necessary for us. It seems we've now established that we're capable of generating our own traffic, and we can explore asset-light approaches that look quite different; and I think our current belief is that we've got considerably greater latitude in how we'll approach shaping our real estate strategy going forward, which likely means we won't have to lay out the level of capital we'd previously anticipated for establishing the touch points we're aiming to establish. That said, make no mistake — considering the productivity showrooms have delivered, we'll keep assessing them as brand amplifiers, though I suspect we'll gain plenty of insights that leave us with a far more nimble real estate strategy over the coming 2 years.

Excellent. As for my second question, after this I'll rejoin the line if I have more. You brought up where you stand on liquidity. It sounds as though you're positioned well enough to ride things out. What's the right way for us to think about how well placed you are to benefit from the Cares Act?