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. Prior to beginning, I want to note that certain material covered in this discussion will contain forward-looking statements about upcoming events and how we expect to perform financially going forward. That covers statements concerning our anticipated outlook, financial forecasts, along with our strategies and opportunities. What actually happens could vary significantly from what those statements describe. To understand the risks and uncertainties involved, please look at the filings our company has made with the SEC, among them the press release issued today. You shouldn't treat our forward-looking statements as forecasts of what will occur later. Every forward-looking statement made during this call rests on 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 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 measures against those non-GAAP financial measures 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.

Thanks, Rachel. Morning, everyone. I appreciate you being with us today. To start off my comments, I'll give you a look at how the company keeps responding to COVID-19, and after that I'll walk through how we did in the first quarter. After me, Jack Krause, our President and COO, will go over the operational side of what stood out in our fiscal 2021 first quarter performance, along with how our key initiatives are progressing given the situation right now. Donna Dellomo, our CFO, will follow with a review of our financial results and a handful of other things tied to our outlook. I'd like to share a few brief thoughts about the turbulent events still unfolding across the country. Naturally, we've already spoken about the COVID-19 pandemic both from a human standpoint and regarding what it has meant for our business. Our gratitude goes out to the first responders, healthcare workers, and essential workers fighting on the frontlines of this battle. We love and appreciate you, and we're committed to doing everything we can to keep offering our support. Second, and just as important, keeping our associates and customers healthy and safe remains our top priority. With that in mind, every one of our showrooms stayed shut for roughly half the quarter, starting March 17 and running through the close of Q1. Since customers were spending more time at home, we made a fast and successful shift to a web-only model, which produced very strong e-commerce results even with showrooms closed. More recently, naturally, the civil unrest across the nation following the appalling Minneapolis event — which tragically is not an isolated incident — has brought about additional disruption. Let me put it plainly: from the boardroom to the break room, it breaks our hearts that this country keeps enduring the painful legacy of racism, and we're eager for action to solve it. On the concrete effect on our business, first, we're thankful that our team members are safe. No locations were harmed, though the civil disruption has added some difficulty to how we're scheduling stores coming back online. That said, our core strategy remains unchanged: once the economy begins to open back up and the disruptions subside, we'll bring our locations back gradually, in line with local rules and rigorous health and safety requirements. In practice, this means we won't move first on reopening speed. Rather, we'll stick to a step-by-step plan for reopening, and Jack will walk through the specifics shortly. Beyond being the correct approach for the people who work with us and those who shop with us, we're lucky that our online sales results continue to be robust. That allows us to take a far more thoughtful approach to reopening, weighing many different factors. Turning to our first-quarter numbers: just over six weeks have passed since we shared our fourth-quarter results, and at that point we laid out specifics on our Q1 performance for the period up to April 12. We're extremely happy that the 400% rise in aggregate e-commerce POS transaction dollars that occurred after showrooms shut down through that point, which we mentioned during our previous call, turned out to be something more than a passing fad; it demonstrates a core competitive edge held by an organization whose DNA includes disciplined multi-channel selling along with logistics know-how. By the close of Q1, we recorded total company sales growth of 33% compared with a year earlier. The results we saw after showrooms shut down—particularly in April—make clear just how powerfully customers react to our Designed for Life seats and sides, which are changeable, flexible, sustainable, upgradable, and shippable, and which are driving share gains, while Sac revenue also grew strongly at 63% and Sactionals at 33%. It also highlights the agility and execution of the entire Lovesac team, who adapted rapidly to shifting operating conditions, and I want to thank every one of our team members most sincerely for their efforts. Of course, we know it matters to combine this revenue growth with the kind of operational excellence that delivers durable profitability and bottom-line improvement. The biggest challenge we're facing there is tariffs. They were the main reason gross margin fell 110 basis points from the same period last year, and that was before tariffs went up to where they are now. I want to say again that we've acted aggressively to reduce the impact of tariffs, and we'll continue to do so. Right now, the vast majority of our Sactionals inserts are made in Vietnam and Malaysia, which aren't covered by the special tariffs. We still make most of our sewn goods, the Sac inserts that get imported and filled in Texas, and the Sac and Sactionals covers in China. We are now actively milling fabric for certain of these items in Indonesia, and by the close of Q2 we'll be selling some of these goods in Vietnam, with goods arriving in Q3. Regarding production still located in China at present, all first costs have been heavily discounted to offset much of the tariff impact. So we continue to observe gradual recovery on the gross margin line even while confronting some anticipated elevated costs within our distribution network, specifically FedEx rate increases and near-term deleveraging as we grow into multiple warehouses. During the prior quarter, we said we anticipated that gross margin recovery from tariff pressure would require roughly eight quarters; we still anticipate that gross margin recovery, yet because of unforeseen disruptions such as being unable to travel abroad at present, which has somewhat slowed our resourcing work in the near term, along with certain shifts in timing for our warehouse initiatives brought about by the pandemic disruption, recovery could take a bit longer than we initially expected. On profitability, our adjusted EBITDA loss of $5.7 million came in just $1 million under Q1 a year ago, even with our whole showroom fleet shuttered for half the quarter. What you're seeing is the result of deliberate, forward-looking actions we took once the pandemic hit — steps aimed at trimming our cost base, safeguarding our cash, and operating as efficiently as we can while still delivering operational excellence. And as we signaled on the April call, our liquidity stayed solid. At the close of Q1, cash stood at $45.5 million, we carried no debt, and $11.4 million was available to us through the line of credit. Through that quarter, our attention went to cutting expenses, working capital and capital expenditures, which Donna will get into. Cash preservation remains a priority for us, and together with our robust liquidity, that gives us the financial flexibility to keep successfully navigating this stretch. So far in fiscal Q2, 89 of 91 showrooms have reopened as of today. Many of them are still operating in some format that's virtual or by appointment only. Where showrooms remain shut, we're still in discussions with landlords, and those talks have been productive. Turning to shop-in-shops and pop-up shops with Costco, Best Buy, and Macy's — not one of them is open in a market where those retail partners have reopened their stores. Even so, regardless of how fast those showrooms and shop-in-shops return, we continue to believe we're extremely well positioned both in the current climate and moving ahead. That confidence comes from what sets our company and business model apart. First, we have a solid balance sheet and financial standing. Second, we offer evergreen, shippable products that are connecting with customers right now and are particularly suited to a DTC only setting. Third, our marketing budget is highly flexible, since we have no long-term advertising contracts, allowing us to make any pivots the shifting environment demands. Fourth, we run an agile, lean operation. Fifth, our diversified sales channel provides multiple high-return ways to extend our brand reach. These qualities continue to serve us well. Through Q2 up to this point, we're seeing the April business trends I referenced pick up speed, largely because our Heroes campaign has performed well, along with broader demand. That said, no one can say how much longer this spike in demand will continue. As I noted before, our attention remains on carrying out our main strategic priorities and putting Lovesac in position to keep gaining market share, no matter what the macro environment looks like. Ahead of handing the call to Jack, I'd like to express my gratitude once more to every one of our employees for their dedication, smooth execution and ongoing commitment to taking care of our customers amid a tough and shifting environment. We truly appreciate everything they have done, as their work has played a part in both our financial results and how we've operated through these extraordinary circumstances. With that said, I'll now hand things over to Jack, who will walk us through our plans, how we're steering through today's conditions, and what the recovery roadmap looks like for FY 2021.

Thank you, Shawn. Good morning, everyone. I want to start by going into more detail about how we're continuing to handle the COVID-19 pandemic. After that, I'll touch briefly on what we have planned for fiscal 2021. As Shawn mentioned, the power of our multi-channel approach shows in the 255% jump in ecommerce during Q1, which let us hold onto more than all of the sales we had in the prior period even with showrooms closed because of COVID; we're happy that our ecommerce channel has kept performing strongly so far in fiscal Q2, and roughly 89 of our 91 showrooms were open as of today, June 9. We're also quite optimistic based on how showrooms have done in these first days of reopening. Our Heroes campaign, which was highly successful, launched in late March and wrapped up just a few days ago, and it played a big part in driving these strong results. Turning to how we're addressing COVID-19, we've kept our focus on the three pillars I described last quarter, with cross functional teams throughout the company carrying them out, which let us build plans simultaneously and respond quickly and effectively. Those pillars are: first, team health and safety; second, business strength; and third, financial resilience. Keeping our associates and customers safe and healthy is still our top priority. Our headquarter staff is still working from home, and right now we're reopening showrooms very gradually while following local and government rules. Our showroom reopenings follow a three-phased approach. Phase one happens in a virtual setting, where associates work out of showrooms but no customers come in. During this phase, they take phone calls, handle online chats, fulfill swatch requests, and give virtual demos to customers. Phase two starts once phase one has lasted two weeks; if conditions allow during phase two, showrooms will run by appointment, with just one customer allowed inside at a time. In phase three, we'll let customers walk into showrooms freely, while following every locally required social distancing and protection rule. The timing of each phase is going to hinge on what the CDC advises and what local regulations allow, which means that if conditions in a given area require stricter rules, we could push a showroom back by one stage. As far as the underlying health of the business goes, we continue to lean on our direct-to-consumer approach and adapt to the current environment. At showrooms that have been shut down, our full-time staff members are still connecting with customers via digital channels such as podium, assisting them as they navigate purchases from their own homes in remote locations and serving as remotely based customer service representatives for the areas they cover. These team members have shown an incredible degree of adaptability and have continued generating revenue that goes far past the amount required to pay their salaries throughout this period. Looking ahead, we fully intend to have our associates take a much more trade area focused approach to serving customers across every channel as we work toward a new normal. During the past nine weeks, our showroom associates have hosted over 80 Facebook Live events, drawing an average peak audience of 278 viewers. Those broadcasts, along with engagement after they air, amount to the same impact as 1.2 million product demonstrations. Beyond that, since we added the Podium widget to our site, showroom staff have been handling on average more than 195 unique web chats each day, generating an average of $1.1 million weekly in sales from web chat by itself. On the marketing side, we continue to refine how we communicate the value-added services from Lovesac — things like complimentary delivery, the option to send items back, try-it-at-home periods without risk, and more swatches being made available. In addition, as a way to recognize the extraordinary contributions made by essential workers, we launched our Heroes campaign in Q1, which ran from 04/03/20 to 05/31/20, and the window to redeem is still open through the middle of this June; through that effort, frontline workers received 40% off, and it has built very strong momentum. As for how we're allocating our marketing spend, we continue to feel good about the greater efficiency we're seeing with Lovesac on Pinterest, Instagram, and our search initiatives, as well as higher conversion rates associated with our email and digital marketing efforts. On top of that, with the number of people visiting our site continuing to grow sharply, it's encouraging that our conversion rate has increased as well — a sign that the traffic we're attracting is much more qualified and involved. Donna is going to walk through our financial strength in a moment, but I want to second what Shawn said: we've had a really powerful beginning to this quarter. With no debt on our balance sheet and over $45 million in cash, we remain quite confident in our liquidity, and that speaks to how fundamentally appealing our platform is as people focus even more on their homes, along with the nimbleness, resilience, and commitment of everyone across the Lovesac team. As we look ahead, conditions are changing every day, and it's hard to tell how much longer the demand and strength we've been seeing will continue. Even so, we're staying adaptable, and our strategic priorities remain in view. Their schedules might move around depending on what's needed, but our attention stays on a few main priorities. First is product innovation. There are new launches coming that we're eager about, and they'll build on the Sactionals platform. We keep assessing when the right moment to launch is; the plan had been for this fall initially, but because of the macroeconomic situation, it will probably slide to the start of 2021. Second is making use of marketing approaches that work well and don't waste resources. Like we talked about, being able to switch fast to selling only direct-to-consumer during this emergency worked really well for us. Our marketing stays nimble and tightly managed, and we're aiming to get the most out of every dollar we spend, something we're glad to say we've managed across all our channels. On top of that, thanks to our Heroes campaign doing so well, we got great numbers from paid search, social media, digital remarketing, and our affiliate program. Many of you have likely seen the TV spots we've had on the air, and it's a pleasure to share that the money coming back from those commercials has looked really strong ever since we launched them in early May. Two factors are behind this better-than-anticipated performance: rates that came in below what we had projected, plus a high level of engaged traffic on our website. Moving on to point three, store openings and our plans for new showrooms. I've already gone over how we're handling the reopening of showrooms. When it comes to how many potential new showrooms we might open this year, the figure will probably land somewhere from 15 to 18, since we've been collaborating with landlords to make adjustments while we keep growing our footprint. Point four concerns running Costco pop-up shop locations as well as testing shop-in-shops alongside Macy's and Best Buy. Because of the COVID-19 pandemic, there isn't much in the way of updates we can offer, but we stay hopeful regarding what lies ahead with each of these key channel partners, and we'll keep looking into the shop-in-shop model with additional retailers too, in light of the encouraging results we've witnessed so far. As a final point, we're still making careful, disciplined investments in our infrastructure, which covers both technology and supply chain. On the supply chain front specifically, our third-party managed California warehouse opened back in February, and we're still increasing the pace of operations there, with expectations of running 150,000 square feet of space come August. Together with the East Coast warehouse we plan to open either late in this fiscal year or early in the next one, this should assist in bringing freight costs down as we move toward fiscal 2022. Beyond that, we're involved in a project with multiple phases aimed at rolling out a supply chain management system, which is going to create efficiencies across planning, production management and order fulfillment functions. Work on this starts in the second quarter and should wrap up by the first half of fiscal 2022. During the first phase, we expect to realize several benefits, including improved tracking visibility along with better demand planning and forecasting — all of which should boost our ability to execute at a high level in Q4 of this fiscal year. Taking everything into account, we feel very good about how the business has been doing as it continues to adjust to the challenges that today's conditions have created. Above all, we have never been more proud of the entire Lovesac team and how they have consistently demonstrated extraordinary resilience throughout this period. While the robust ecommerce momentum we've seen under these circumstances is encouraging, we do expect it to ease somewhat, given that the heroes campaign I referenced earlier has now ended and our showrooms continue to reopen. There's certainly some uncertainty around how sales will move as states reopen and consumers get used to the shifting economic realities, yet we're confident that the distinctive strengths of our business model will keep working in our favor, and paired with disciplined execution of our strategic priorities, they put us in a good position to extend our market share gains. With that, I'll hand things over to Donna so she can walk through our Q1 financials and give a brief summary of the financial resilience teamwork. Donna?

Thank you, Jack. Good morning to all of you. My remarks will open with a look back at what we achieved in the first quarter, and after that I'll lay out a framework for how we're thinking about the rest of fiscal 2021. Net sales rose 32.8%, reaching $54.4 million, and that gain came from triple-digit growth in our Internet channel plus an 11% lift in our other channel tied to our shop in shop locations. Partially offsetting this was a decline in showroom revenue, caused entirely by temporary showroom closures stemming from COVID-19. For specifics on our comparable sales performance, please see our press release. Now let's look at the first quarter by channel. Showroom revenue dropped 32.7% to $18.1 million, which was due to temporary showroom closures tied to COVID-19. Internet sales rose 255.4% to $30.1 million, which shows how well we pivoted to emphasizing ecommerce while showrooms were shut. Our other channel, which includes pop-up shops at Costco and shop in shops at four Macy's and three Best Buy locations, increased 11% to $6.2 million. That gain versus last year came from the Macy's and Best Buy shop in shops, partially offset by a modest decline in our Costco business, which stemmed from a COVID-19 driven temporary drop in pop-up shop activity at Costco. Now for the product breakdown: Sactionals revenue climbed 33.4%, Sacs jumped 63.3%, while our remaining group — decorative pillows, blankets, and similar accessories — fell 58.7%, a decline tied to lower sales of select Sactionals accessories and the fact that newer platform items such as the Power Hub are now recorded within their corresponding Sactional and Sac platform net sales. We saw gross margin fall 110 basis points. The main reasons were tariffs, more promotions—especially around our Heroes campaign—and higher freight costs. Those pressures were partly offset by lower product costs, which came from vendor negotiations tied to tariff mitigation, plus our ongoing move of sourcing away from China toward Vietnam and Malaysia. Just to remind everyone, the way our tariff mitigation work and higher shipping expenses are landing right now is what's creating this short-term hit to gross margin. And like Shawn mentioned, we anticipate gross margin will recover as time goes on. On an adjusted basis, selling, general and administrative costs climbed 8.3%. The main drivers were higher spending on infrastructure upgrades tied to our e-commerce platform, plus greater selling-related costs that came with the rise in net sales. Those gains were partly offset by lower equity compensation expense. As a share of net sales, SG&A leveraged 1,075 basis points, reflecting both the cost-cutting steps Jack described earlier and the reduced stock-based compensation expense. The SG&A financial resilience actions we've implemented thus far affected Q1 only slightly. Their complete effect will show up starting in Q2. Our advertising and marketing outlay, which generates returns across extended time frames, increased $2.8 million — about 190 basis points — and came to 15.1% of sales. This rise stemmed from efforts to promote awareness of Lovesac's major value-added features, such as complimentary delivery, money-back guarantees, and try-before-you-commit windows, plus expenditures on creating content, developing new products, and fiscal 2020 research costs that were charged to expense in the first quarter of fiscal 2021. Those Q1 2021 expenses for production, innovation, and research — roughly $750,000 — were recorded under prepaid assets and other current assets on our balance sheet as of February 2, 2020. Depreciation and amortization climbed $570,000 versus the same period a year earlier, hitting $1.6 million, mostly tied to capital investments in new and remodeled showrooms plus infrastructure spending. During the first quarter of fiscal 2021, we posted an operating loss of $8.4 million, versus an operating loss of $9.3 million in last year's first quarter, which came from the sales growth and SG&A leverage I mentioned a moment ago. Net interest income for the first quarter came to $56,000. Tax expense in the first quarter of both fiscal 2021 and 2020 wasn't material, and it stemmed from minimum state income tax liability. Prior to covering net income, earnings per share, and EBITDA, we'd ask that you review the terminology as well as the reconciliation tying each adjusted metric to its closest GAAP counterpart, all of which appear in the earnings release issued earlier today. For the first quarter of fiscal 2021, our net loss stood at $8.3 million, equating to a loss of $0.58 per share, whereas the first quarter of fiscal 2020 showed a net loss of $9.1 million, or a loss of $0.67 per share. Adjusted EBITDA landed at negative $5.7 million, versus negative $4.7 million during the comparable quarter a year ago. When you compare how much adjusted EBITDA fell year over year against how much the operating loss fell over the same period, the difference is explained by the net decrease in adjusted EBITDA add-backs, mostly equity compensation. Turning to the balance sheet, our liquidity position remains healthy: at the end of Q1 we had $45.5 million in cash and cash equivalents, plus $11.4 million accessible through our revolving line of credit, and we hadn't drawn anything on the revolver. That figure is about $10 million above what we had anticipated, because POS transactions came in ahead of our Q1 forecasts. Inventory at period end was up 8.1% compared with a year earlier, driven by stronger sales along with greater capitalized freight and warehousing expenses related to tariffs and higher inventory levels. Free cash flow, which we define as cash from operations minus CapEx, was a use of about $2.7 million across the 13 weeks ended May 3, 2020, versus a use of about $10.1 million in the prior-year quarter. That year-over-year gain came mainly from better cash from working capital. On outlook: because COVID-19 disruption remains so uncertain, we aren't giving guidance for fiscal 2021. Like Jack and Shawn said, we're happy with how strong ecommerce has stayed over this period, and also with how our showrooms have done during the first days back open. That said, we recognize that our Heroes campaign, whose redemption codes remain valid through June 14, has played a major role in driving that strength and performance, and it's difficult to gauge how long tailwinds such as greater customer interest in home related categories like ours will last. We'll keep staying flexible and keep tight control over our expense structure and the revenue trends as we work through the uncertainties of the current environment. Looking at the second and third quarters of this fiscal year, we expect operational cash burn on a quarterly basis to be lower than the comparable periods twelve months ago. We also anticipate finishing the fiscal year with a solid cash position and nothing drawn on our line of credit. Our outlook still calls for cash to come in from working capital during this year, driven by accounts receivable, inventory levels coming down in relation to sales volume, and extended payment terms that vendors have approved. These projections factor in CapEx of $12 million to $14 million, plus 15 to 18 new showroom openings planned for the year. Considering what we're seeing in business patterns, the way we keep managing expenses and cash carefully, the fact that we carry no debt, plus solid liquidity, we feel assured about our financial strength, our capacity to get through today's conditions successfully, and our ability to keep growing Lovesac's market share. Now we'd like the operator to take back the call and start the Q&A portion. Operator?

Excellent. I appreciate you answering me. I have a couple of things, then I'll rejoin the line. For the first one, I was hoping you might share a few more reflections regarding the additional capabilities you've picked up amid the pandemic — things like your remote selling push, basically — and how you might put those to use down the road once all your showrooms have their doors open again.

Hi, Tom. I appreciate that. That's mine to handle. Speaking as Jack, my sense is our whole outlook on how we regard our showrooms has certainly shifted, and as a matter of fact, the terminology used within our organization is truly about transitioning away from calling people showroom staff and toward calling them trade area staff. My sense is this carries a significant effect on how we approach a great many matters. Consequently, my sense is there's an amazing capacity here to help us operate more efficiently as an organization, as we consider drawing on our biggest group of workers to scale up and down across service, sales, and various other tasks. So honestly, it's been quite a revelation for us. Something else that has likewise been quite a revelation for us is just how fast we're able to shift away from being, in a sense, a business that depends on foot traffic and become a business that draws people in as a destination. And once you pull that off, countless possibilities open up. So there's plenty we're evaluating. Clearly, an enormous number of forces are in flux, yet we identify many chances worth chasing further when it comes to revamping how we promote ourselves and genuinely making the most of our team members.

Fantastic. That's terrific to hear. Now for my follow-up, and after that I'll rejoin the queue: could you discuss how your main consumer is doing financially, considering unemployment sits at 13.3% and especially your bad debt expense — or your exposure to bad debt, more precisely?

Sure. At this moment, I'd say our visibility is fairly limited, since so much has been shifting. Clearly, when we look at things through the lens of our own operations, we recognize that our customer is affluent and doesn't seem to face an immediate threat from the developments of the past couple of months; that said, over the longer term it remains highly unpredictable. Still, we believe we've got the right customer segment. Ours is a premium brand. So to whatever degree that provides protection, I'd say our sentiment is positive, though there are numerous uncertainties regarding what lies ahead over the next six months.

Great. There are additional things I'd like to ask, but I'll rejoin the queue.

Hi, Tom. Regarding bad debt, our exposure is minimal, if there is any at all. Credit cards account for the bulk of what we sell, including our Synchrony Financial credit card — roughly 40% of our volume — and in that case, the financial responsibility sits with Synchrony. That responsibility isn't ours to carry. Costco represents most of what we have in wholesale receivables. Therefore, we likewise don't perceive any danger on that front whatsoever.

Great.

Hello, and good morning. That was a really strong quarter. Nice job navigating a difficult backdrop. To start, regarding the ongoing jump we're seeing in e-commerce revenue — and I realize separating the pieces isn't easy — you referenced in your prepared remarks how much the Heroes campaign helped. So one thing I'd like to know is whether you can better quantify that effect. And beyond that, can we determine in any way what share of shoppers are first-time Lovesac customers? When you look at that, would you say it's mostly about the broader change in retail overall, with consumers spending more time at home, or is it partly about the adjustments you've made in your own marketing to lean more digital?

I'll take a shot at answering that; and Shawn and Donna, you guys < >. I think there are a few things going on — first, our new customer count was quite striking in the first quarter. We recorded the biggest quarter-over-quarter rise in new customers since we started tracking it; so we saw an increase of nearly 60% in new customers. Alright, so I think it's pretty clear from that, when brick and mortar was going through all that upheaval, we turned into a true go-to option. And obviously, I'd expect that disruption to ease up over the next couple of months. That said, I believe certain lasting effects are going to stick around permanently — so that's where we are now. Really, there are two customer groups in play here. One is new customers who found us because of the disruption. The other is customers we know delayed buying since showrooms were shut. As those showrooms reopen, we're watching those trade areas come back too. What I take away from this is that our approach treats showrooms as something that will remain essential too. To phrase it another way, places where customers can physically engage with what they're buying matter a lot when the item costs between $4,000 and $6,000. Now that we understand we're able to operate as a destination business, the definition of what counts as a physical engagement point shifts — it could be a shop in shop, it could be a strip location, or it could even be someone running a demo inside a customer's home. We're genuinely broadening our thinking about how to build the tactile, in-person connections we require in a way that actually works, and then pair those with a marketing strategy, because we now understand we're able to run this as a destination business. So there's plenty of opportunity out there, and we've also enjoyed plenty of favorable conditions. Honestly, during the last two months, advertising costs have dropped, people's appetite for nesting has risen, and our e-commerce operation has clearly been delivering stronger results. We don't know what will occur over the next 2 months as far as short-term dynamics go, but we do think the trends we're observing let us be much smarter going forward and consider our real estate strategy. Shop in shops and showrooms will remain part of what we do, but I believe we'll be extremely aggressive in how we approach negotiating down the road.

Then here's my second question, Jack. Again, I realize it's still early. But now that you're beginning to open the showrooms back up and you're thinking through certain changes that have to be made at this point for what you might call a world after COVID, should we be considering — might there be some kind of meaningful change when it comes to the costly infrastructure behind the showrooms?

There isn't anything I'm able to tell you right now. No would be the answer, I believe. What I think we'll do is this — in how we think about the business, the service model, and the showroom model, going forward we'll gain a greater capacity to leverage our costs and to expand without increasing the labor rate. So as we grow, I believe we'll get more efficient. Beyond that, though, nothing major.

Appreciate all the color. Thank you.

Thank you.

Wonderful. I appreciate you fielding my question. I simply wanted to inquire regarding what you're putting into advertising and marketing. So could you possibly bring us up to speed on how you're viewing brand investment overall? Is that still something you consider a major chance for the business? Also, what's the right way for us to frame the amount and the way ad spending will trend as the year goes on? And after that, I've got a second question.

Thank you. Broadly speaking, a few points, and I believe Donna brought this up in her prepared remarks. We saw a fairly substantial rise in spending versus the same period a year ago during Q1, and much of that was tied to prepaids shifting from the prior year into this one; so, when we look at spending at present, we continue to expect a normalization in marketing spend landing somewhere in the range of 10% to 13% of the overall business. We don't believe a major shift is necessary. As a matter of fact, ROIs are climbing at this moment. Thus, we're in a genuinely strong position where we can handle our spending quite efficiently and are achieving better ROIs in Q1 than anything we've recorded up to now; so, I believe that's a positive sign as we move ahead and watch our business speed up, without needing to rely on marketing growth from outside.

Understood. Then, as a second question, were there any Costco online events during Q1? Also, what expectations exist for the remainder of the year?

My recollection is that we did one event. Donna? Online events with Costco are going to happen. Our roadshow is something we're working on together with Costco. Clearly, because of the pandemic, priorities shifted across all kinds of organizations. As a result, some of Costco's priorities have shifted. And clearly, their mixes and merchandising mixes have shifted as well. So, with them, we've been placed on hold. However, when it comes to how things performed before the pandemic, and what we expect going forward, it's likely that we'll reengage and get that business moving again during the second half of the year, though specific insights aren't something I can provide.

Thanks, that's helpful.

Hello everyone, good morning, and I appreciate you fielding this. I was hoping to build on a few things that came up before. After Q1, how significant was the Heroes campaign when it came to the mix of sales? And once it winds down, is there another campaign we slot in as we move toward Q2? Also, would any gains from a new campaign land mostly on the showroom side or the online side?

Regarding the Heroes campaign — it mattered a great deal. Looking at May, during the weeks with the heaviest volume before Memorial Day, it climbed to account for more than half of sales. We do figure, of course, that some portion of that momentum will slip away once Memorial Day has passed. Our internal plans and our spending both take that into account. Still, we don't expect to have to lean on things like the Heroes event all year long; depending on market conditions, it could be something we run, but here's the main point — we see no reason to think discounts will grow in the back half of the year at a pace any different from what you've already witnessed.