The Lovesac Company (LOVE) Earnings Call Transcript & Summary

Thank you. Good morning to all of you. Joining us 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, please let me note that certain information we'll cover will contain forward-looking statements about upcoming events and how our finances will perform going forward. Among these are statements concerning our expectations for the future, financial projections, and our plans and prospects. Results in reality could vary materially from what those statements lay out. To understand these risks and uncertainties, please look at the company's SEC filings, among which is today's press release. You shouldn't treat our forward-looking statements as forecasts of what will happen later. Every forward-looking statement we're making during this call rests on assumptions and beliefs held as of today, and we assume no duty to revise them, unless applicable law demands it. Today's discussion will also cover 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 on their own. A reconciliation from the most directly comparable GAAP financial measure to that non-GAAP financial measure appears as supplemental financial information in our press release. At this point, I'd like to hand the call over to Shawn Nelson, Chief Executive Officer of the Lovesac Company.

Hello, everyone, and thanks for being here today. To start, I'll give you a picture of how we're continuing to navigate a shifting business climate, and after that I'll walk through how we did in the second quarter. Following me, Jack Krause, who serves as our President and COO, will cover how operations performed during the fiscal second quarter and where we stand on our main initiatives given today's conditions. Our CFO, Donna Dellomo, will then take you through the financials along with several additional points tied to our fiscal 2021 outlook. Although business conditions remained difficult throughout the second quarter, I couldn't be happier with how resilient our team has been and how well they've adjusted while we keep delivering for our customers. In the quarter, we started bringing showrooms back online using a careful, step-by-step method. Our e-commerce site kept playing a key role as the customer's initial point of contact in the buying journey, and often it was where people completed their entire Lovesac purchase. By the time the quarter closed, every showroom was operating in some capacity, though plenty remained virtual or open only by appointment. We're still putting the well-being and safety of our team members and shoppers first, and we're using our full-time staff as trade area representatives while also taking advantage of our improved tech tools. Regarding the Macy's and Best Buy shop-in-shop locations, by the close of the quarter 5 out of 7 had opened, while the other 2 came back online during August, after the period ended. Jack and Donna will get into this shortly, but during Q2 we ran just 19 pop-up shops inside Costco stores, versus 209 a year earlier. Customer interest remained robust in our Sactional seats and sides — changeable, flexible, sustainable, upgradable, shippable, and built for live — and when paired with our capacity to adjust effectively to shifting operating conditions, which included a particularly successful Heroes campaign, the result was a 28.7% rise in overall Q2 sales, with e-commerce up 387%. The Our Heroes initiative, which paid tribute to frontline workers and first responders, performed really well. It brought in new shoppers while accounting for more than 50% of our revenue between April 3 and May 31, 2020. Redemptions carried over into the early part of June 2020, which meant it touched slightly more than one month of fiscal Q2. We're happy to see the business holding up strong even after that campaign wrapped up. To properly steer things through such an unpredictable climate, we kept a tight grip on what we bought for inventory and what we spent, and we stayed cautious with our marketing and promotional activity during Q2. All of this helped us keep moving forward through the pandemic's disruptions and maintain a solid financial standing. Tight control over how we run things, plus a little help from when certain costs landed, pushed our gross profit dollars up by nearly 28% and gave us adjusted EBITDA of $2 million on the plus side. That was also a first for Lovesac — never before had we posted positive adjusted EBITDA in this particular fiscal quarter, aside from Q4, and it reflects how the company keeps maturing on the road toward generating cash. And because we managed working capital carefully and stayed strict about what we spend on capital, we ended the quarter in a strong cash position of about $55 million. We can't see where this pandemic ends just yet, and all that time spent at home has driven demand for household-related goods and solutions to levels that are nearly unheard of, especially for items such as ours that are simple to configure and buy on the web and get delivered fast without any contact through Fedex. On top of that, the distinctive dedication we have to sustainability, paired with how good our products are and how easy it is to get them fulfilled, continue to serve as significant points of difference and major factors behind why customers choose to buy. We're embracing those points of difference and emphasizing them even more strongly within our go-to-market approach. More specifically, the wins we've achieved by having our full-time showroom staff oversee an entire trade area rather than a single showroom have really paid off, above all when paired with technological upgrades like podium chat systems, along with our website that was recently moved to a new platform and improved with fresh capabilities that Jack is going to walk through shortly. We believe every one of these notable distinguishing traits puts us in an even stronger spot to seize the market share chance that follows down the road. While we carry out our plans in the short term and steer through this highly fluid operating climate, we're pushing forward on the efforts that form the foundation of our long-term growth plan. Along those lines, we keep making strategic bets on our infrastructure that will back our expansion and simultaneously generate efficiencies and lift the customer experience. It's very exciting to us that the August rollout of our entirely new e-commerce platform came off without a hitch, even in the middle of such fast growth; this fresh platform brings a number of enhanced capabilities for showcasing what makes our product offering unique, while letting us speed up our efforts to improve the seamless omnichannel experience for the customer. When it comes to supply chain, we're still preparing for our East Coast warehouse to open late in this fiscal year, and that's anticipated to assist in bringing freight costs down during fiscal 2022 and afterward. Looking at product development, we're staying sharply focused in the shorter term on bringing out a new product innovation that will add to the Sactionals platform. We continue to expect that the Sactionals platform technology innovation we've talked about before will launch early in our next fiscal year. Now shifting to how we're performing right now; we've just come through a really robust Labor Day stretch, during which we switched the marketing machine back on after having let it idle for a while, so we could steer clear of any inventory problems following early COVID caution around inventory levels. At this point we believe we're in a good spot for the back half of the year. Our inventory flow has climbed back up, and once again we're putting money into infrastructure and restoring expenses that had been paused or trimmed for a time, especially when it comes to marketing, so we can fuel still more growth. We stay nimble while steering through these conditions, and we keep pushing hard to experiment and gain insight when it comes to marketing, bring innovation to our products, and lift the omnichannel experience we offer customers, all so we can capture a bigger slice of this enormous upholstered furniture market — a market where our penetration is still below 2%. Turning to what's left of this year, we're confident in our capacity to generate robust growth compared with a year earlier, though we acknowledge the backdrop is still unpredictable. Because of that, we'll stay quick on our feet and adaptable, and we'll keep a disciplined mindset when it comes to how we operate the business. When we consider the year's back half, right now our plan is to launch 7 to 10 additional showrooms, yet as of now we anticipate no contribution from Costco in-store roadshows, something Jack and Donna will cover in more detail; we look for sales momentum to carry on in Q3, quite similar to the sales growth achieved in Q2. And since costs are returning to the business and marketing has been switched back on, at present we anticipate adjusted EBITDA pressure during Q3, followed by a return to solid profitability along with growth on the adjusted EBITDA line in the fourth quarter, when volume is seasonally high. Naturally, we'll stay adaptable, ready to seize opportunities, and focused on net returns as we build our brand and keep reinforcing our omnichannel customer experience; so to wrap up, I'm delighted by how the team has performed so far and by the way we've handled this fast-changing landscape. Our balance sheet and financial position are solid, and our offering connects particularly well right now, supported by a lean, agile operating model featuring a marketing budget we can flex and a range of sales channels that helps broaden our brand's reach. Before I hand things to Jack, I'd like to express gratitude to every one of our associates for the effort and commitment they've shown our customers through these difficult times. With that, I'll pass the call to Jack so he can give you an operational update and talk about how we're progressing on our main strategic priorities.

Thanks, Shawn, and welcome, everybody, to this morning's call. I'll kick off my comments by going into more detail about how we're still handling the COVID-19 pandemic. After that, I'll touch briefly on what we intend to do for the rest of fiscal 2021. During Q2, we stayed flexible and quick on our feet, putting the well-being and safety of our employees and shoppers first. The operational shift that worked so well—something we spent a lot of time on during the prior quarter—kept paying off as we brought showrooms back online, often with quite restricted capacity. On top of that, how tightly we controlled costs, working capital and capex further strengthened our financial footing. The robust demand backdrop, combined with how we executed, shows up clearly in the 28.7% top line growth we posted for the quarter, along with our new customer figures. We drew in 50% more customers versus a year ago, and new customers on the Sactionals platform climbed by nearly 70%. Let me turn first to how our showrooms are operating. Starting in mid-May, we rolled out a step-by-step reopening plan for showrooms. Keeping our customers' and staff's safety front of mind, we put 3 distinct showroom operating models in place: virtual, appointment and walk-in. Thanks to these 3 models, we could reopen safely across numerous trade areas while retaining the flexibility to switch easily among them whenever pandemic conditions got worse or better. Right now, every Lovesac brick-and-mortar showroom, plus 7 shop-in-shops alongside Macy's and Best Buy, is open under one of those 3 phases. While showrooms were shut down for a stretch, we picked up a tremendous amount about the way the lovesac.com customer interacts with our showroom associates. Because of that, we've pushed harder into delivering this kind of sales and service as a permanent piece of our strategy going forward. As we noted on the quarter 1 earnings call, the podium platform keeps proving to be an effective way for our associates to connect with customers online. As this approach has grown, wait times have improved dramatically. We've also watched a substantial number of customers reach out to us via this platform so far, and they're converting at rates higher than anything we'd previously witnessed in showrooms or online. Before the podium launch and expansion, these were customers who had no way to talk with a salesperson on our website. We've also come to understand that the Sactional demo plays a vital role in how we sell; that's why we've kept using Facebook Live to connect with a far bigger audience, and we saw solid gains in live broadcasts and viewership during the second quarter. Turning to our staffing model and the utilization that goes with it. In Q2, we kept making progress toward aligning our selling and service teams so the customer gets one seamless experience. This approach lets us shift our people resources around to serve the customer digitally, over the phone, in the showroom, or wherever they happen to be in their shopping journey. Over the 10 weeks that have passed since we broadened this program, internal service measurements have risen by double digits—things like accessibility—and we've also cut quite a bit off the typical amount of time a customer waits before reaching an agent. Our sales and service groups have shown real agility during this stretch, and that makes us quite proud. Although the operating environment has shifted quickly over the past few months, our attention stays on pushing forward the strategic items that matter most, so we can achieve long-term growth, pick up market share, and scale this business effectively. Those items are: first, innovating on products; second, marketing and promotions that are efficient; third, adding new showrooms; fourth, growing our presence in other sales channels; and fifth, investing in infrastructure in a disciplined way. Turning to product innovation. The Power Hub and Storage Seat, our newest innovations, keep lifting AOV and margin. To put a finer point on it, more than 1 in 4 Sactionals orders contain roughly 2 Storage Seats on average, while 1 in 7 orders include at least 1 Power Hub. We're actively pursuing our innovation roadmap, with a new product now in development that should launch in quarter 1. Now for marketing and promotions. During the second quarter, our marketing dollars worked extremely efficiently, since lots of advertisers cut back on their ad spending, which temporarily pushed advertising costs down across the market. We've stayed agile and seized opportunities with our marketing spend, aiming to maximize ROI while leaning into platforms where our customer has boosted adoption of over-the-top media/Hulu, which we currently intend to make up a meaningful portion of our TV spend in the campaigns ahead. Beyond that, we got strong results from our successful Heroes campaign, paid search, social media, digital remarketing and affiliate programs. Digital conversion channels—search, social affiliates, and so on—delivered some of our best ROIs to date as well; during the second quarter, we put to use many of the Q1 learnings by testing these strategies at a larger scale; we enjoyed considerable success and positive ROIs with what we refer to as warm prospects, meaning shoppers who have done something like ordering swatches or who hold an open quote; we sent them messaging tailored specifically to whichever action they had completed. That targeting happens via e-mail, social media marketing and retargeting ads. And as we test and learn more about these segments, we keep widening the avenues through which we can connect with them across their digital journey. As we mentioned on the prior call, our Heros campaign generated a substantial volume of top line sales before and through the Memorial Day holiday, accounting for more than half of our sales while it ran. During June and July, we started deliberately reducing what we spent on promotions and marketing. That included a moderation, compared with the prior year, in media spending across the remainder of the quarter after Memorial Day, plus reductions in promotions where we had overlapped the flash sales from last year that we chose not to bring back this time. We took these steps while still successfully keeping the related top and bottom line effects in balance and under control. Because of that, our confidence has grown regarding the chance to handle volume, margins and supply chain effectively through a combination of higher-margin activities. When we consider marketing for the remainder of the year, the dynamics of the media market are shifting — moving away from COVID-driven cost tailwinds toward pre-Election-driven cost headwinds. Flexibility, along with a disciplined emphasis on returns, stays critically important as we keep navigating this environment. On the subject of new showrooms, we remain on track to open 15 to 18 showrooms during this fiscal year, and we expect to finish the year with 104 to 107 showrooms in total. In the second quarter, we opened 8 showrooms across 6 markets. We have shifted into a soft launch mode, without brand opening events, and new showroom performance is consistent with the conditions under which they operate in their markets. Over the past couple of quarters, we've gained substantial knowledge about our capacity to run a genuinely omnichannel business. Results within markets keep demonstrating to us that showrooms drive customer acquisition, and we will keep opening showrooms going forward.

Even so, we've gained a great deal of insight into how well we can connect with shoppers during the research phase for our items. That's going to open up some exciting fresh directions for how we approach touch points down the road, and we think that will sharpen our customer acquisition efforts further. Turning to broadening other channels. Our outlook on channel partnerships over the longer term stays positive, and we'll keep looking into the shop-in-shop setup with retailers wherever it's justified for brand awareness as well as economics. We recently finalized an arrangement with Best Buy to offer a limited assortment of Lovesac Sactionals and Sacs through bestbuy.com, and we anticipate rolling that out during the back half of this year. As Shawn noted previously, we conducted just 19 in-person roadshows alongside Costco during the second quarter, a sizable drop in volume versus a year ago — that's a $4.4 million decrease, or up 60% year-over-year. Though for the remainder of the year we aren't currently anticipating any contribution from Costco, that volume uncertainty gets balanced out by no meaningful effect on profitability, thanks to margin benefits driven by mix. Our financial expectations for partner channels are higher, since our capacity to build brand awareness organically keeps growing. And last, on infrastructure. Midway through August, we introduced our new e-commerce platform, powered by Magento. With Adobe behind it, Magento's cutting-edge e-commerce platform lets us advance our seamless omnichannel sales approach so we can meet and surpass our customers' shifting needs in a COVID and post-COVID world. Through our website, customers can gain a full understanding of how powerful and unique our product platforms are, and enjoy a unified experience alongside our showrooms. Among the notable feature and function upgrades is the product configurator, our new 3D 360-degree product visualization software, letting customers build their own Sactionals — adding pieces, rearranging, swapping and personalizing covers, easily adding accessories — all from a single place, in whatever environment they pick. With an improved showroom locator, shoppers can rapidly locate information, reach the showroom they like best, and even access Google Maps driving directions directly on lovesac.com. A key point: getting directions to a favored showroom no longer requires leaving our site. Using sophisticated website targeting tools, we can guide shoppers toward the shopping behaviors we want based on local circumstances and what customers need. We've added new payment methods, Apple Pay among them, which gives buyers more options and makes the conversion path smoother; thanks to these enhancements, we'll run more efficiently across every showroom format — virtual, appointment and new normal — since the customer journey is fully omnichannel; turning to the supply chain side. We continue to drive down our final mile cost with the addition of 2 more regional distribution centers to our network, 1 located in California and 1 in Pennsylvania. Although COVID-19 pushed back the California site's launch by 3 months, we've sped up operations there and it now operates at 150,000 square feet. Combined with the East Coast warehouse we plan to open later in this fiscal year, we expect this to help reduce freight expenses and further improve the customer experience in fiscal 2022. Beyond that, we've launched a multiphase effort to deploy a supply chain management system, which will generate efficiencies in planning, production management and order fulfillment. That effort got underway in Q2, and at this point we anticipate wrapping it up by the first half of fiscal '22. We look forward to gaining visibility into tracking, demand planning and forecasting, and that should strengthen our capacity to execute with excellence in Q4 of this fiscal year; we're also continuing to move forward on our resourcing plan, bringing down our cost to sales while simultaneously reducing our supply risk post-COVID-19; we now have 3 production sources across 3 countries for Sactional and < >; and we've locked in extra discounts to offset China tariffs; so all told, we're extremely happy with how the whole Lovesac team has executed as we've adjusted to a shifting operating environment and at the same time moved our strategic initiatives forward. The way we shifted how we operate because of the pandemic turned out to matter and to work well, which is evident in what we posted for the second quarter. Alongside that shift, our marketing was efficient, and we stayed disciplined about running effective promotions in the quarter, the Heroes campaign included; back in Q1, we managed to generate demand and lower expenses amid a period of uncertainty. When Q2 came, we generated demand around Memorial Day and handled demand well across our supply chain for the remainder of the quarter, all while deliberately cutting back on discounts. Given that, we feel increasingly assured about our capacity to keep demand, service quality, and promotional markdowns in proper alignment within this operating climate — something our strong Labor Day performance clearly demonstrated. As previously mentioned, we cut back and postponed a large portion of expenses across the first six months of the year while the pandemic was ongoing, and those costs will come back during the back half as we zero in on seizing our long-term expansion opportunity. Among these are restoring pay, implementing raises for most of our employees, bringing on additional roles to fuel infrastructure expansion, putting money back into market tests and product development, along with higher operational costs tied to launching new showrooms. We're staying committed to making shopping across channels feel more connected for our customers, and we're thrilled about the upgrades we've introduced to our digital platform, which is already making the customer experience better. Going forward, we'll stay disciplined and adaptable given that conditions remain uncertain, while we keep innovating, running tests and learning, growing awareness of our brand, and improving how customers feel about shopping with us; at this point, I'll hand things over to Donna so she can walk through our second-quarter financial results and share some specifics about what we expect for 2021.

Thanks, Jack. Morning, everybody. I'll kick things off by walking through our Q2 results, then lay out how we're thinking about the rest of fiscal 2021. Net sales rose 28.7%, reaching $61.9 million, powered by triple-digit gains in our Internet channel. That was partly offset by a 58.9% drop in showroom sales from COVID-19-related showroom closures, plus a 59.3% decline in other sales, entirely tied to the Costco in-store pop-up shops Shawn and Jack talked about. Comparable sales overall climbed 72.4% for the quarter. The reason comp growth outpaced total sales growth is the decline in our other channel and in noncomparable showroom sales. Other channel sales fell 59.3%, or $4.4 million, mainly from a big drop in Costco in-store pop-up shops tied to COVID-19; on top of that, non-comparable showroom sales declined 63.3%, or $3.7 million, because of COVID-19 showroom closures. All the specifics on comparable sales performance are in our earnings press release. Looking at product category, Sactionals sales were up 39.7%, Sacs sales were down 18.3%, and our other category — decorative pillows, blankets and other accessories — rose 188.5%. The Sacs decline stems from fewer Costco pop-up shops, a higher Sacs index in that channel, and promotional activity weighted heavily toward Sactionals in our showroom and Internet channels. Gross margin fell 30 basis points year-over-year, driven mostly by a 198 basis point rise in distribution and tariff-related expenses, partly offset by 167 basis points of improvement in product costs from vendor negotiations tied to tariff mitigation and our ongoing shift of product sourcing away from China. The modest 6.5% year-over-year rise in SG&A dollar spend reflects the COVID-related financial resilience measures we put in place and an expense shift that began midway through quarter 1. If you exclude the financing costs from the prior year, most of the rise compared with a year earlier was driven by heavier investment in upgrades to the infrastructure behind our e-commerce platform, pricier leases across our 97 showrooms, bigger insurance bills, and more equity compensation expense linked to grants made during fiscals '20 and '21. Working the other way, we saw smaller pop-up shop fees because pop-up shop sales fell, lower employment costs after trimming headquarters pay along with part-time showroom associate roles, and reduced travel stemming from COVID-19 restrictions. Our selling, general and administrative costs, measured against net sales, came in 785 basis points lower. That improvement came from leverage we gained on employee-related costs, occupancy, and selling expenses such as credit card processing fees and pop-up shop charges. These gains were partially offset by increases in insurance, stock-based compensation, and computing costs associated with infrastructure spending. The SG&A financial resilience actions we initiated in Q1 generated approximately $4.2 million in savings and deferrals during the second quarter. Those same cost-control and deferral efforts extended to our advertising and marketing spending, which was up only $1.1 million in Q2 compared with the same quarter a year earlier. The cost-control steps we put in place starting in Q1 produced roughly $4.3 million in second-quarter savings and postponed advertising and marketing expenses. The year-over-year rise in advertising and marketing dollars stemmed from spending more on media and direct-to-consumer programs, and that spending contributed to the sales gain we saw in Q2. As a share of sales, advertising and marketing dropped by about 100 basis points versus the same period last year, coming in at 11.6% of sales. Depreciation and amortization came in at $1.5 million, which is $338,000 higher than the same period a year ago. The increase was primarily due to capital investments in new and remodeled showrooms, along with infrastructure investments. For the second quarter of fiscal 2021, our operating loss improved to $1.1 million, compared with an operating loss of $4.9 million in last year's second quarter. That improvement was driven by the sales increase and SG&A leverage I just discussed. Overall, we estimate that approximately $5 million of expenses deferred in Q2 will shift into the back half of this fiscal year. Net interest expense for the second quarter was $34,000, which related to unused line fees on a revolving line of credit. During Q2 of fiscal years 2021 and 2020, the amount owed for taxes wasn't significant and stemmed from obligations tied to minimum state income tax. Prior to moving on to discuss net income, earnings per share, and EBITDA, we ask that you look at the terminology and the reconciliation showing how each of our adjusted figures compares to the closest GAAP measures, all of which can be found in the earnings release we put out earlier today. We recorded a net loss of $1.1 million, which works out to a loss of $0.08 per share, for the second quarter of fiscal 2021, whereas the same period a year ago showed a net loss of $4.8 million, equivalent to a loss of $0.33 per share. We posted adjusted EBITDA that was positive, at $2.2 million, versus a loss on the same adjusted basis of $3.3 million during last year's second quarter. Roughly $5 million of that gain came from the expense shift into the back half of the year that I just referenced. Now on to the balance sheet. Liquidity is still solid: when the second quarter closed, we held $54.8 million of cash and cash equivalents along with $9.9 million available under our revolving line of credit, and nothing was drawn on that revolver. Inventory at period end was up 0.9% compared with a year earlier. The reason is that our stock inventory dollars rose by about 5%, which was partly offset by lower capitalized freight dollars tied to tariffs. On this call, free cash flow is what we get when we subtract CapEx from cash generated by operations. For the 13 weeks that wrapped up on August 2, 2020, that figure came in at roughly $9.9 million. In the same quarter a year earlier, we had a use of about $15.8 million instead. What drove the improvement over last year? Mainly stronger cash flow from working capital, plus the fact that we pushed certain costs out of Q2 and into Q3 while we were trying to mitigate COVID. Now for guidance: since the disruption from COVID-19 is still so hard to predict, we're offering only a limited outlook for fiscal '21, and we'll make a few specific comments about Q3 that relate to the expense shifts currently in motion. As Jack and Shawn noted, we're entering this period after a solid Labor Day, and we're confident we can generate sales growth versus last year across the back half, though we're still watching plenty of unknowns. Also remember that we're not counting on any benefit from Costco pop-up shops during the back half, so your models ought to be adjusted for that. For the third quarter, we anticipate gross margin falling roughly 200 basis points compared with a year ago; that drop is mostly tied to a timing change involving China vendor rebates that were captured in Q3 a year ago and will instead be captured in Q4 this year, plus inventory turn costs from restocking our safety stock and launch expenses for the Northeast third-party warehouse. Those pressures are partly countered by lower promotional discounts and reduced product costs from our vendors overseas.

The third quarter is also going to feel the effect of costs we pushed off during the first six months of the year, in both SG&A and advertising and marketing. So when we compare Q3 with Q2, we anticipate fairly large increases in operating expense on a year-over-year basis, plus considerable deleverage year-over-year, and only afterward do we expect to capture significant leverage along with a meaningful lift in adjusted EBITDA during our fourth quarter, which is seasonally our highest-volume period. Because we deferred those expenses out of the first half of the fiscal year and strategically brought our infrastructure investments back starting in Q3, our belief is that the adjusted EBITDA loss in Q3 will land somewhere between $10 million and $11 million. Taking into account the movement in adjusted EBITDA dollars from one half of fiscal 2021 to the other, as I just walked through, we think we will come out net positive on adjusted EBITDA for the fiscal year. We continue to anticipate generating cash from working capital during this year by way of accounts receivable, inventory reductions tied to sales volume, and extended payment terms that vendors have approved. Our outlook continues to assume CapEx in the $12 million to $14 million range, along with 15 to 18 new showroom openings planned for this year. So to wrap up, we're quite excited about the back half of the year and have confidence in our capacity to deliver healthy sales growth. Expenses do bounce around somewhat from quarter to quarter. Yet viewed as a whole across the second half, we anticipate delivering a significant rise in adjusted EBITDA, which reflects strong top line growth, gross margins that improve relative to the second half of last year, and expense leveraging. We picked up a great deal over the past couple of quarters, and what we learned has been folded into our go-forward plans as we keep growing our brands and capturing additional market share in this highly fragmented industry. With that, we'd like to hand the call back to the operator, who can open the lines for questions. Operator?

Nice work on such a robust quarter. My questions are about where you stand with inventory and a few of the supply chain remarks you offered, Shawn. From several of your rivals, we keep hearing about tightening supply, so given the strong demand you're witnessing, how comfortable are you with your inventory position as it currently sits? Also, how well can you keep up with that demand as it accelerates? And is any part of your supply chain showing strain?

Yes. Camilo, thank you for asking, and before I hand things to Jack, let me mention a couple of points. Inventory is not a worry for us; through the COVID crisis we've managed very deliberately, choosing moves for the company that let the shape of our sales truly match the business across what we regard as the toughest stretch of the COVID crisis so far. That includes how we handled marketing spend, and as the results show, it let the business thrive during this period. Still, we're eager for a second half in which we can be aggressive and focused on driving sales, and inventory remains nothing we're worried about; Jack can say more on that.

Absolutely. Thank you. What happened there, I believe, involved a pair of factors. In the near term, clearly, as Q2 got under way — at the start of the second quarter, things truly started to decelerate, and then business accelerated, and accelerated quickly. The supply chain experienced a bit of whiplash. So, as I'd describe it, there were possibly some very near-term strains from a strategic standpoint when it came to constructing our network, making our network more diverse, bringing additional warehouses on board, and so forth; we are precisely where we ought to be. Thus, although COVID caused a bit of whiplash, from a strategic perspective we are precisely where we ought to be, when it comes to steadily expanding our capacity to deliver a great deal of product while keeping customer satisfaction high.

Great. Then, could we zero in on that quite striking and ongoing surge in online digital? Perhaps you could walk us through how that revenue increase unfolded across the quarter, and whether your online demand shifted in any way — the path it took over those months, as stores came back and now into the beginning of Q3.

Yes. It's tough to — Camilo, make a blanket statement about the whole period, since the nation was, I'd say, running on differing schedules — differing windows and differing degrees of reopening. What we observe are, in a sense, micro environments. Here's what we can share: in places where showrooms had been fully closed, we witnessed dramatic jumps in e-commerce. Yet in places or trade areas where showrooms are beginning to reopen, we observe — we still observe quite strong e-commerce gains, but larger overall trade area growth. So my takeaway from everything we've picked up is that our customer will shop through multiple avenues; and when we can merge how our teams operate by — truly not caring which channel the customer begins in, while reaching them effectively, we do very well. So to put it briefly, here's what I can share. We likely witnessed dramatic accelerations. We clearly witnessed dramatic accelerations in the e-comm business, likely something that — as numerous folks have noted, COVID has pushed certain aspects of our thinking ahead by 2 to 3 years. My guess is we'll return to a more modest share of the business coming from e-comm, yet I doubt we'll ever return to the state we were in previously. And moreover, by framing our business differently, I'm not even certain going forward what will count as an e-comm business as opposed to a trade area business.

Okay, understood. Then, Donna, one last thing — could you give us some clarity here: will that $5 million deferral be recognized entirely in the third quarter, or is some portion of it going to be divided between Q3 and Q4?

Yes; most of it lands in the third quarter, though a few items also move into the fourth quarter. If you're trying to frame it, the bulk falls in the third quarter. Mostly in marketing.

I'd like to express my congrats as well for < >. What I want to ask is sort of building on the earlier question, but concerning real estate. During your prepared remarks, you mentioned that you keep opening showrooms at a good pace. Considering everything you've observed — I mean regarding the flex — that big upward flex in online sales, and perhaps you're also seeing how some of these locations or trade areas perform as you bring showrooms back. Has your approach to opening new ones shifted? Are you getting — do you have more leverage? Are you having more discussions with landlords about rent? Or perhaps changed the places where you'd put these showrooms?

Wow, yes, that's quite a lot to unpack. What I can tell you is that we're right in the midst of a really dramatic reevaluation of this. Rather than viewing it as a real estate strategy, what we now call it is a touch point strategy. The reasoning there is that we've already, during stage one, separated out the requirement for inventory as a component of a retail operation, which clearly makes us extremely efficient and functions in our shop-in-shops and all the rest. What we've truly discovered over the past 60 to 90 days is that in many instances we can begin to similarly separate out the requirement for touch points to actually bring in traffic by themselves, since we can generate our own traffic; so in a situation like the current one, that accomplishes 2 things. First, it lets us examine real estate in an entirely different manner, far more asset-light, with much shorter arrangements. And clearly it also provides us a very solid position to return and renegotiate. So I believe what you'll witness is a speeding up of touch points using considerably less capital than we'd previously intended as we move through the coming couple of years, though there's much more to share on that.

Understood. Then for my second question—unrelated to that, though we've talked about it before—beyond the product lineup. Obviously things are quite fluid and there's a lot happening, but do you have anything more to say about when we ought to be thinking of the timing for that?

Yes. At this point we're still planning a Q2 launch in the next fiscal year, and we're really excited about it. Shawn, I don't know if you'd like to add anything?

Yeah; we haven't shared much about it, and that's how we'll keep things. Still, we're excited for what's coming. All of it is proceeding as planned, and we believe it's going to matter a lot.

You really emphasized the base sales for this quarter. Could you discuss the marketing plan you had around Labor Day this year? And regarding media costs, what have you been noticing more lately? Also, is there anything different in your wider advertising approach as we head into this year's holiday period?

Alright. I'll share what I know at this point, though I won't go too far ahead. Overall, we definitely anticipate that total marketing spend by year end will align with what we talked about before, finishing at roughly 12% to 13%; therefore, short-term swings you observe will even out. About Labor Day, what I can say is that we were extremely happy with how we managed to use marketing. The ROIs we saw heading into Labor Day and throughout the demand cycle so far were the highest we've experienced this year. So everything is performing quite well; that's clearly one reason we're at ease with what Donna brought up earlier. So ROIs keep climbing. We're staying quite cautious. Our projections are in fact set much more conservatively regarding ROIs, since we're somewhat worried about media effectiveness once an election year arrives. So we have an election year ahead, which concerns us greatly, plus possible new COVID interruptions. But as for what we're observing at present, ROIs are greater, and we can deliver the business at a better quality level, which means that on the whole, we're beginning to see that we can hit targets while offering fewer discounts. There's more to share on that as we keep running a set of tests and learning from them.