The Lovesac Company (LOVE) Earnings Call Transcript & Summary

Thanks. Morning, everybody. Joining me are Shawn Nelson, our Chief Executive Officer, Jack Krause, President and Chief Operating Officer, and Donna Dellomo, Chief Financial Officer. Ahead of getting underway, I want to remind all of you that certain information we'll talk about will contain forward-looking statements about upcoming events and how our finances will perform going forward; that covers statements concerning our expectations for the future, financial projections, plus our plans and prospects. Results in reality could vary materially from what those statements lay out. To review 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 predictions of future events. Each forward-looking statement we make during this call rests on assumptions and beliefs as of today, and we assume no duty to update them unless applicable law requires 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 in isolation from them. A reconciliation from the most directly comparable GAAP financial measure to that non-GAAP financial measure appears as supplemental financial information in our press release. At this point I'd like to hand the call to Shawn Nelson, Chief Executive Officer of The Lovesac Company.

Hello, everyone, and thanks for being with us this morning. I'd like to kick off my comments by going over the main highlights from our third quarter results. Jack is going to walk through what happened operationally during the quarter, along with how we're progressing on our key initiatives while conditions remain dynamic. After that, Donna will take you through our financial results and a handful of other items tied to our outlook. Through the quarter, we kept steering successfully through a difficult environment, which our financial results and operational progress both make clear. Top-line growth came in strong at 43.5%, beating what we had expected, and that speaks to the outstanding work our team has done to keep up with customer demand in a setting affected by the pandemic. I remain deeply proud of and thankful for everything they've put in. We captured remarkably high profit flow-through on that sales gain, thanks to how quickly we acted to trim costs and overhead while keeping tight control over inventory throughout the pandemic. Naturally, now that sales have come back, expenses will follow, and Donna will get into that in greater detail. Let me now turn to a few operational highlights. We're happy with how our showrooms have done given the pandemic conditions, since we ran them in multiple formats — walk-in, appointment only, and virtual. Evidence of that strong showroom showing appears in the 25.5% comparable showroom sales gain for Q3. Each of our 7 shop in shops with Macy's and Best Buy stayed open through the quarter, and Jack will cover that more thoroughly. The major announcement that came out before the quarter closed is our launch of a substantial product assortment on bestbuy.com, timed right ahead of the holiday. This broader partnership has us very enthusiastic, since it lets us connect with a wider audience and speed up adoption of the Sactionals platform. We remain energized by how well the Best Buy customer demographic lines up with ours, particularly regarding their intention to purchase in the home category while shopping at Best Buy, frequently in connection with a move or a remodel. As you know, there are well-documented headwinds in the supply chain landscape that we're working through, among them a broad scarcity of ocean containers and equipment. On the whole, we've managed to hold excellent inventory positions and right now are getting most orders out to consumers within a week to 10 days, just as expected. Turning to our financial highlights, demand for our products stayed very strong in Q3, producing $74.7 million in sales, a 43.5% sales increase, and that figure includes 125% e-commerce growth. On top of that, we saw revenue contribution from 2 Costco temporary online pop-ups, each running roughly 4 weeks and wrapping up in September and October, which weren't part of the expectations we gave you on our Q2 call; the quarter got off to a strong start thanks to positive momentum from our Labor Day campaign, which delivered very well with media ROIs coming in above what we had anticipated. Looking at profitability, we did much better than we had anticipated, driven by a mix weighted toward higher-margin products and price promotions that worked better, along with certain shifts in timing and costs we deferred, which Donna will get into shortly. Consequently, adjusted EBITDA reached $6 million in the quarter, and we closed the quarter holding $47.7 million in cash, an increase above 70% versus a year ago, with no debt on the balance sheet. Though the climate is still unpredictable, we stay focused on sharpening what we can do, what we offer, how customers experience us, and truly our whole go-to-market stance, as we aim to grow our slice of this highly fragmented sector. The traits of our brand and products that consumers connected with before the pandemic — specifically the ease of researching and buying online and getting the product through FedEx straight to their home — were only amplified while the pandemic went on, since more hours at home meant more spending on the home. With the rapid shift to fully digital while showrooms shut, then a move back to our omni-channel approach, we have gained enormous insights; we possess highly up-to-date market research that clarifies the nuanced distinctions between our millennial and post-millennial shoppers and how they are allocating spend during the pandemic; we are adjusting our messaging and marketing approaches to match those insights; we have additionally validated many digital-first methods, ranging from individual FaceTime product demonstrations to large-audience Facebook Live events and plenty more besides. We figure we have conducted more than 2 million digital Sactionals demos across the last six months. Almost every one of these fresh methods we have developed throughout this period will continue even once the retail environment goes back to how it was, and we feel great confidence in our capacity to sustain high growth even after the pandemic. Maybe most crucially, throughout the pandemic, we have drawn lots of new shoppers into the Lovesac family; this expansion of our customer base will produce gains for many years ahead, and we will ensure we apply our refined marketing strategy to foster engagement and boost attachment rates and lifetime value among these new buyers; we also continue to have under 2% unaided brand awareness alongside considerable opportunities to take market share. We will extend these new customer wins as we push harder into marketing, backed by extremely strong ROIs, as Jack will cover. Even with the pandemic, we stay dedicated to the company's long-term potential and to advancing the strategic programs already in motion to fuel long-term growth and market share gains. We keep investing to support the growth we expect while staying nimble and disciplined. That includes putting money into infrastructure, such as our California warehouse and our new East Coast warehouse set to open in Q4. Also continuing to restore expenses that had been paused or trimmed temporarily, especially in marketing, to generate still more growth. When it comes to product innovation, our efforts remain ongoing, and we're still aiming at early next year for the debut of an exciting new item that lets us move into an adjacent home category. Improving how customers experience us across channels. As we mentioned before, our new e-commerce platform went live in mid-August, and the response to the better user experience and functionality has been very positive, with additions like showroom appointment scheduling, quicker configurator page loading, the ability to save configurations, and other enhancements to the customer experience. We've seen better conversion from both mobile and desktop, along with a higher attachment rate. Turning to sustainability and ESG, we think Lovesac is the leader among DTC and furniture players when it comes to dedication to sustainability and ESG efforts, creating sustainable goods and helping keep furniture waste out of landfills. This has been central to who we are from the day the company began, steered by our Design for Life philosophy, and we've made substantial headway so far — sourcing every bit of our thick upholstery fabric from 100% recycled plastic and giving new life to more than 20 million plastic bottles in the past year by itself. Our items are made to endure a lifetime and engineered to adapt. In the coming year, we'll be enhancing how we communicate our tracking impact. Holding to our demanding standard for innovation and sustainability will, in our view, drive share gains in existing and even additional categories we'll enter over time, as we make operating choices that support our purpose — inspiring humankind to actually buy less but buy better. With the year's final quarter now underway, we feel good about our fundamentals and our positioning; the strong start to the fourth quarter has pleased us, though we're keeping COVID uncertainty in mind, particularly given the high volume shopping days ahead and the chance that holiday shopping moves earlier in the season. All in all, we're happy with our third quarter results, which came in above our expectations on both the top and bottom line. In a pandemic-impacted environment, we produced a positive adjusted EBITDA of $6 million, marking the first time we've been profitable in the third quarter. We've been highly disciplined in running the business, tightly managing expenses, inventory, and working capital, some of which we know is temporary. As sales come back, so will costs, among them marketing overhead and headcount. Entering the fourth quarter, we believe we're positioned very well to keep driving demand and to capitalize on the demand we've seen year to date for our distinctive products that are connecting with the consumer. We're eager to build on our success so far as we finish out the fiscal year. Before I hand the call to Jack, I just want to thank every one of our associates for their hard work and dedication to our customers through these difficult times. Having said that, I'll now hand things over to Jack, who will give you an update on operations and talk about how we're advancing on the strategic priorities that matter most.

Thank you, Shawn, and I want to wish everyone a good morning. Our top-line expansion in the third quarter illustrates that we have maintained our nimbleness and our ability to steer the company toward serving strong demand from both new and returning buyers, regardless of the manner or location in which they choose to purchase from Lovesac. The third-quarter figures we recorded for first-time buyers showed just how effectively we are generating brand recognition and attracting new shoppers. Compared with the same period a year earlier, our overall customer base grew 34%, while the number of new customers on the Sactionals platform climbed by nearly 40%, and each of those developments is a positive sign for what lies ahead. Let me now briefly bring you up to speed on how things are going operationally, covering both our showrooms and our channel partners. Right now, every one of our showrooms — all 100% — is operating in the walk-in phase, which stems from stricter health and sanitation measures I'll get into in a bit. We're also planning on the basis that shifting market conditions could flip this situation quickly. Turning to channel partners, our Best Buy shop and shops keep hitting or surpassing what we anticipated, and after the quarter closed, we broadened our ties with Best Buy so that Sactionals are now sold on bestbuy.com. By putting our products in front of shoppers at both well-known and cutting-edge online sellers such as Best Buy, we widen recognition of our brand and create one more point of contact along the path customers take when considering Sactionals. This broader alliance gives us the chance to connect with a larger group of people and speed up how quickly the Sactionals platform gets taken up; in our view, the Best Buy name and the kind of customers it draws align really well with Lovesac, and we're eager for a productive relationship that keeps expanding. On top of that, all four of our Macy's shop-in-shops are now operating and remain productive. Regarding the Costco pop-up shops, last quarter we didn't discuss any physical locations, but we shifted direction to pilot and subsequently launch two short-term online pop-ups. These ran for roughly four weeks, wrapping up in September and October, and brought in $7.7 million in total volume. A third shop is currently operating and will continue through December 6. The key point is that, even with an 8% sales drop stemming from the shift in the Costco business, profitability across our partner channel business development improved overall thanks to a better partnership structure. Our efforts on a long-term deal for the Costco business are ongoing, and once our Q4 results are out, we'll share a fuller update on the Best Buy and Macy's partnerships. During Q3, we moved forward well and achieved meaningful gains across our long-term strategic growth initiatives, and I'll go through those now. Since Shawn has already addressed product innovation, I'll move directly to our key initiatives, beginning with the efficiencies in marketing and merchandising strategies. From our marketing spend, we keep generating greater efficiencies and strong returns. When it comes to our core media spend, this year's results delivered 50% more incremental sales versus the previous year. We also saw media ROI climb substantially relative to last year, and part of that lift comes from having more showrooms and touchpoints. As we've said before, showrooms act as really strong amplifiers — both for the brand and for the return we see on our marketing dollars. Each new location we open adds about 1 point of ROI improvement. On top of that, we've kept our attention on using other tactics to widen reach and connect more deeply with our target customer, including nonlinear buys like Hulu and over-the-top media, and at the same time we've been fine-tuning our linear buy so it reaches more people. Thanks to these approaches, we estimate our reach climbed from 65%-80% during Q3 of this year compared with the prior year, which supported our media ROI. Going forward, we'll keep emphasizing nonlinear media within our buy to expand reach, since each has a part to play. Fresh merchandising methods allowed us to generate sales at higher margins, which is reflected in our results. Robust media and brand momentum let us rely on fewer promotions, because building brand awareness brings new, highly qualified customers into the business, and consequently their conversion rates across retail and online rank among the highest we've ever recorded. In addition, our merchandising approaches have supported elevated AOVs by shifting product mix toward premium and higher margin covers, along with better catchment rates for new products, as Shawn referenced. To illustrate, our premium LoveSoft and down insert experienced a 10 percentage point gain in their mix year-over-year during Q3. Showroom operations. In Q3, we launched 10 showrooms across 9 markets and finished the quarter with 107 showroom locations in total. We also opened, just last week, our final showroom for the year in Hoboken, New Jersey. So far this year, we've opened 18 showrooms, with one relocated showroom opened during this fiscal year and counted as new, bringing our overall showroom openings for the year to '19. In this setting, we continue to pick up a great deal of insight while refining how we pursue operational excellence. We've implemented broader health and sanitation measures through Evolve SR — our so-called COVID operating model — including the addition of plexiglass where customers most often interact, plus arranging showrooms so they could operate in a walk-in mode across the entirety of Q4, depending on market conditions. A showroom mission control position has been developed and introduced to assist customers, along with immediate appointment booking that we rolled out in November; driven by the Calendly platform, this setup operates in much the same way as a restaurant reservation system, enabling showroom staff to schedule private, one-on-one appointments with customers, whether virtual or face-to-face. At this moment, we're introducing enhancements allowing shoppers to schedule their own appointments in a smooth way via our lovesac.com site. In light of the current climate, this is a capability our shoppers asked for, and the response has been very positive. With the busiest holiday period approaching, we expect it will resonate even further with customers looking for personalized attention. Other fresh showroom offerings now include lease line block demos, choosing fabrics, and picking up swatches. In addition, we established and implemented a dedicated post-purchase specialist role that proactively reaches out to both web and showroom buyers to boost their satisfaction after purchase, handling tasks such as order confirmations, tracking notifications, and delivery follow-ups. When it comes to staffing our showrooms, as I mentioned earlier, every showroom manager and assistant manager moved out of the traditional showroom setting, Tier 1, and into a virtual trade area setting, Tier 2, at the peak of COVID-19, which let them sell remotely through podium web chat. Showroom managers additionally finished extra training so they could handle customer live chat, email and phone, plus processing returns; after that we raised CSAT in our customer love department by almost 20 points and saw a big drop in how long refunds took, which shows what these changes accomplished as we bend and adjust to this new situation. Third, regarding growing our presence and sales in other channels, I've already covered where things stand with our Best Buy and Macy's partnerships. We'll keep chasing opportunities with additional partners, and we'll give you updates whenever there's noteworthy news. Last, regarding making disciplined investments in our infrastructure, which includes technology and supply chain. First, e-commerce. Since we launched our new e-commerce platform in mid-August, we've seen better conversion, powered by both mobile and desktop.

Beyond that, attachment rates have climbed — they now stand at 40%, compared with roughly 34% before launch when it came to sectional purchases that included accessories. Today, accessories form a piece of the buying journey as customers put together their own setup. Since launch, we've kept adding enhancements and capabilities to the site, such as quicker loading of configurator pages, showroom appointment booking, a save-your-configuration feature, and other upgrades to the customer experience. As noted before, feedback from customers on appointment scheduling has been strongly favorable, and roughly 40% of our business is now appointment driven — a figure that was 0% prior to COVID-19. Turning to the supply chain, our focus remains on cutting costs, boosting efficiencies, and lowering supply risks across that chain. Our regional distribution center in California is running at full capacity across 150,000 sq ft. We remain on schedule to launch our East Coast warehouse at the close of this fiscal year; beyond that, we're involved in a multi-phase effort to roll out a supply chain management system, which will generate efficiencies in planning, production management, and order fulfillment functions, and will strengthen our ability to execute with excellence. To help diversify our supplier base, we now count three production sources across three countries for sectional inserts. All told, we remain happy with the way our teams have adapted to the environment in ways that will pay off over the long run. We keep learning how to draw customers effectively, and we're putting the processes and infrastructure in place to deliver growth that is sustainable, brand accretive, and profitable. Looking ahead to the crucial holiday selling season, we're continuing to draw on our rising media spend while getting our showroom operations ready for traffic across the holiday period by rolling out our appointment system on the website and in showrooms alike. We're quite pleased with the strides we've made in building a genuinely omni-channel brand, one where the channels work together seamlessly to improve how customers research and buy. With that, I'll hand the call to Donna to walk through our Q3 financials and some specifics tied to our 2021 outlook.

Thanks, Jack, and good morning, everyone. I want to begin by taking you through our third-quarter results, then I'll share how we're framing the remainder of fiscal 2021. Net sales rose 43.5% to $74.7 million, driven by triple-digit growth of 125.2% in our internet channel and a strong 27.9% rebound in our showroom channel. That was partly offset by an 8.7% drop in other sales, which came from having fewer Costco in-store pop-up shops, partially offset by shop-in-shops and the 2 temporary online pop-ups on costco.com that Jack mentioned. Those temporary online pop-ups lifted Q3 sales beyond our expectations, because when we gave our Q3 sales growth expectations, we had assumed no net sales contribution from Costco. Total comparable sales, which includes internet channel net sales plus comparable showroom point of sales transactions, increased 53.5% for the quarter, reflecting the 125.2% gain in internet channel net sales and the 25.5% increase in comparable showroom sales. For all other details on our comparable sales performance, please refer to our earnings press release. Turning to product category, Sactionals sales rose 46.8%, Sacs sales rose 30.6%, and sales in our other category, which covers decorative pillows, blankets, and other accessories, rose 6.2%. Gross margin increased 487 basis points compared with the prior year period, reflecting a 535 basis point improvement in gross profit from less promotional discounting, a favorable product mix shift, and lower product costs tied to vendor-negotiated tariff mitigation initiatives. Partially offsetting those gains was an increase of roughly 48 basis points in distribution and tariff-related expenses. We came in above the third quarter gross margin expectations we shared with you on our last call, with the upside mainly coming from less promotional discounting and a more favorable product mix than we had anticipated. On top of that, we captured benefits from vendor rebates in the third quarter that we had previously expected in Q4, and the anticipated step-up in freight and warehousing costs came in lighter than planned because of a shift in the timing of projected inventory receipts. Depreciation and amortization increased $476,000 from the prior year period to $1.9 million. The modest 6% year-over-year increase in SG&A dollars reflects the impact of our COVID-related financial resilience measures. That year-over-year increase was driven largely by higher employment costs, increased rent tied to our 107 showrooms, a rise in equity compensation relating to the modification of stock options, and credit card fees connected to the increase in internet and showroom sales. Partially offsetting those increases was a decrease in in-store pop-up shop fees related to the decrease in in-store pop-up shop sales, along with lower overhead expenses resulting from COVID-19 related travel restrictions. SG&A as a percentage of net sales fell approximately 1,228 basis points, resulting from the leverage of employment costs, selling-related expenses such as credit card fees and pop-up shop fees, rent, equity compensation, and expenses related to COVID-19 restrictions such as travel. Selling, general and administrative expenses ended up about $5.1 million under our forecast, largely due to the continuation of our financial resilience initiatives, which deferred professional fees and hiring-related payroll that got pushed back. Investments in advertising and marketing, which deliver returns over longer horizons, climbed $3.7 million, or 75 basis points, and accounted for 14.7% of net sales in Q3, driven by greater spending on media and direct-to-consumer programs, and that contributed to the sales increase in the third quarter. That increase landed roughly $1.9 million beneath plan, as certain activity moved into the fourth quarter to support the promotional effort together with the test and learn initiatives we have lined up for the fourth quarter. Depreciation and amortization increased $476,000 from the prior year period to $1.9 million, up from $176,000 in the same period a year ago, primarily reflecting capital investments in new and remodeled showrooms. In the third quarter of fiscal 2021, operating income was $2.5 million, compared with an operating loss of $6.9 million in last year's third quarter, driven by higher sales and gross margin as well as the SG&A leverage I just described. Net interest expense for Q3 totaled approximately $47,000, chiefly from unused line fees on our revolving line of credit. Tax expense in the third quarters of fiscal 2021 and 2020 was immaterial and related to minimum state income tax liability. Before we turn to net income, net income per share, and adjusted EBITDA, please refer to the terminology and the reconciliation between each adjusted metric and its most directly comparable GAAP measurement in the earnings release we issued earlier today. Net income was $2.5 million, or $0.16 in diluted earnings per share, in the third quarter of fiscal 2021, versus a net loss of $6.7 million, or $0.46 diluted earnings per share, in the third quarter of fiscal 2020. We generated positive adjusted EBITDA of $6 million, compared with an adjusted EBITDA loss of $3.7 million in last year's third quarter. Turning to our balance sheet, liquidity remains strong, as we ended the third quarter with $47.7 million in cash and cash equivalents and $19.2 million of availability on a revolving line of credit, with nothing outstanding on the revolver. On outlook, since COVID-19 related disruption remains uncertain, we are not providing formal net sales guidance. We are pleased with how fiscal Q4 has started, though it is unclear how much of that reflects an early holiday season start. Beyond that, COVID cases continue to rise, which creates uncertainty, and we still have very large volume holiday shopping days ahead of us. Finally, we have 3 temporary online pop-ups with Costco planned for the fourth quarter, versus the 2 we ran in the third quarter. So while we currently feel good about our ability to deliver healthy net sales growth year over year, we do not expect it to match the level we posted in Q3. Turning to profitability, we still expect our adjusted EBITDA margin rate to climb, because the leverage we get on gross margin will be greater than the planned deleverage in operating expenses. Where gross margin is concerned, fewer discounts plus the benefit of cycling tariffs ought to more than offset pressure coming from freight and supply chain costs, and shifts in spending will produce operating expense deleverage. Consequently, for Q4 we expect a strong increase of 50%-60% in adjusted EBITDA versus last year, building off the $8 million we posted in Q4 a year ago; we continue to expect cash to come in from working capital this fiscal year, and our outlook still has CapEx coming in between $12 million and $14 million. Additionally, depreciation and amortization rose $476,000 compared with the prior year period, reaching $1.9 million. In closing, Q3 was exceptionally strong for us in both net sales and profitability, and we look forward to completing what has been an unprecedented fiscal year, one in which we made major progress across every area of the business. We will keep building on that momentum in fiscal 2022 and beyond as we position Lovesac for long-term growth, generating value for all of our stakeholders. With that, we would like to turn the call back over to the operator, who can open the line for questions. Operator?

Excellent. Thanks. Shawn, Jack, and Donna, I hope you all remain in good health. There's one thing I'd like to ask, plus a second one after that. Shawn, speaking broadly, I'd like your take on how much COVID-19 has helped your customer lifetime value and your cost to acquire customers, and how much of that gain is temporary versus lasting. Then I have a follow-up.

I'll say something brief, then let Jack cover anything I miss. It's a fast-moving situation, to put it mildly. In a lot of instances, especially within the home segment, clearly Lovesac and similar businesses have been viewed as maybe beneficiaries of COVID-19, with folks doing their jobs from home and putting money into their houses. Although I think a great deal of our recent wins stems from how nimble the team is and how well we respond to conditions, we definitely acknowledge those tailwinds. For us, instead of merely enjoying higher sales, the way plenty of others in the segment have, alongside shrinking inventories and extended lead times — there are so many items I've personally attempted to buy as a customer that are simply unavailable at the moment or require waiting far longer than you'd think. That hasn't happened to us, given how we've handled things. I'd say the outcomes for us have shown up more in the bottom line over the short run. Basically, we've received more while giving less, plainly, with leaner front-line crews, after cutting back right at the start and hunkering down for COVID. Then there's how we invest in marketing — our ROIs are definitely elevated and climbing, in part because of fresh approaches, yet clearly helped by these sorts of tailwinds. Over the long run, our view is that we'd still want to keep up strong growth, not only via new product innovation, which is coming, but also through the continued test-and-learn approach we've shown for quite a while, our dedication to marketing innovation and bigger spending as we scale up, perhaps anticipating that the tailwinds will fade. On the top line, we think we can keep growth high. Sure, the figures grow larger and tougher, but that remains our view. On the bottom line, the company is gaining leverage and, you know, hitting that critical mass where I believe we can demonstrate it. Meanwhile, we'd anticipate part of that tailwind eventually fading, though we have time working in our favor there, from that angle. I don't think we're oblivious at all to the sorts of, let's say, COVID tailwinds pushing some of our current success, but we haven't allowed it to become an out-of-control train and simply, you know, send sales sky-high while draining our inventories. We've taken great care to keep that in check. Jack, I’m not sure whether there’s anything you’d like to add there.

I believe you've addressed quite a bit regarding handling that situation. My one observation, Tom, relates to market dynamics—if you examine it purely through consumer behavior, then clearly amid enormous upheaval, there's an edge for us to capitalize on when brick-and-mortar faces turmoil. During that brick-and-mortar upheaval, we undoubtedly turned into the go-to option for individuals who previously enjoyed fewer alternatives. That's a favorable wave which, clearly, isn't permanent and clearly carries its own expenses. Then, considering merely the extended horizon, that favorable wave will disappear, clearly; all of us wish for that. Over the extended horizon, though, that favorable wave signals a benefit for us when you consider several of the bigger trends, I believe, that are unfolding. I believe corporate headquarters relocating away from metro areas, fewer headquarters being central means individuals are leaving metro areas, and I believe concentrating on residences. Learning from home is emerging as a fresh trend, along with working from home. I believe purchasing homes, clearly, over the coming 2 years will likely stay at a heightened level. Those, viewed as a genuinely long-term consumer trend, give us strong confidence. And how individuals are starting to buy, plus how our product is crafted and how our service is crafted, gives us real confidence regarding the extended horizon. The near term, extremely hard to predict.

One more point, and I apologize for tacking this on, but in my view Lovesac's biggest opening—and maybe its greatest edge in the market—is the distinctiveness of what we sell. To put it another way, we aren't merely a retailer riding some broad macro trend. There remains a product we offer that the majority of shoppers in the furniture category have yet to hear about, and which, in our admittedly biased view, beats competing offerings on a great many dimensions. As our platform gets taken up—a platform with stickiness that generates repeat business and, clearly, earns a very strong satisfaction score from customers—we expect it to build momentum by itself as adoption widens and reviews climb. With more word of mouth, the platform will keep expanding. From that angle, this sort of favorable current is wonderful for us, since it helps propel us farther along that road and boosts both the pace and the heft of that flywheel. That, I'd say, is one distinctive quality of this business, setting it apart from a retailer that's simply surfing a trend.

Great work, Shawn. Great work, Jack. For my next question, I've really admired how you've shifted your brick-and-mortar showrooms toward appointment-based shopping as a way to fuel online interaction. Taken as a whole, if we suppose that by the back half of the coming calendar year conditions are somewhat back to usual, and you can get every one of them open again the way they used to be, can you estimate the productivity level of those showrooms and how much upside exists should you get them operating at pre-pandemic capacity?

We're examining plenty of fascinating items there. Let me put it this way. Even though we're aware there were some genuinely intriguing results and movements involving the web and the showrooms amid the openings and closings, the key lesson, I'd say, is that web and showrooms share a tremendous amount of synergy. What has actually happened — my biggest takeaway, I'd say — is that instead of a split shopping experience, it's now turning into an integrated one, with more research happening online. At the showroom, it becomes a chance to close. For us, that carries a few implications. It means enormous potential to keep studying how touch points function in relation to the web. Touch points, naturally, cover quite a few possibilities. They cover shop-in-shops. They cover possible concierge services. They cover items such as our showrooms. They cover kiosks, and they cover additional partnerships. What we're discovering at this moment is that our go-to-market approach now offers far more choices than it did 12 months back, and that makes us feel truly confident about the productivity our touch points will deliver going forward.

Excellent. Thanks, Jack.

Thanks. Morning, everybody. What a standout quarter. Congratulations. I believe this marks the first Q3 since the IPO where you turned a profit. Let me start there, particularly regarding gross margin. Perhaps, Donna, you could walk us through where things stand with the tariff wind down efforts, and what we ought to expect regarding added expenses tied to the short-term costs of opening the distribution center in Q4. I'm trying to get a handle on this, because it looks like the gross margin expansion has arrived earlier than the schedule that was previously communicated. Any insight into that progress would be greatly appreciated.

Morning. Several points. Likely the largest driver behind our gross margin improvement is discounting — the promotional discounting, the decrease in promotional discounting — along with some product mix shift toward higher margin items. Regarding your question on how far along we are with tariffs, in dollar terms, roughly 42% of our inventory purchases, mainly on the cover side, still originate from China. We continue to feel the impact, though it diminishes as we move through the year. You're observing a year-over-year gross margin increase stemming from the tariff shift. A greater portion comes from the promotional discounting and certain vendor pricing negotiations that help us offset the tariffs still arising on products arriving from China. Hope that answers. We still carry tariff inventory, and tariffs will still cycle through, affecting our gross margin. We expect at a reduced and further reduced level, you know, as the years progress. We still have some inventory arriving from China that tariffs affect. As for the Northeast warehouse, it should be fully operational by the close of the fourth quarter, meaning staffed inventory going in, and so forth. The startup costs are far lower than we initially expected, which is excellent; we don't expect a meaningful impact on our gross margin for the rest of this year, even entering Q1 of next year, regarding the startup costs for the Northeast warehouse.

Wonderful to hear, that's wonderful. Thanks for that context. Jack and Shawn, could I just pose something regarding how you're thinking about returning to the big jump you've seen in your customer base. Jack, you mentioned a 34% rise in your customer file compared to last year.

Correct.

What I'd like to understand is how you use that data to stretch out that lifetime value. You've gotten some sort of COVID-related tailwind this year — how do you make those gains really sticky going into next year and beyond? What's the plan and the thinking behind taking that fast growth in customers you've gotten?

That's the great part, and I think that's what gets us excited when we discuss the platform approach to marketing. Once someone buys into the Sactionals platform, we keep innovating and working on new products inside that platform; we touched a bit on, you know, the tip of the iceberg, things like attachment rates rising from 30%-40%, adding the storage seat, adding the electrical charging components. Those things are beginning to really clearly help us. Clearly, there's a powerful message when it comes to the product's lifetime value and flexibility, and buying covers adds to that too. Broadly, what we're seeing at the moment is that while new customer rates have been accelerating, attachment rates and repeat rates when it comes to purchases have held steady and stayed very strong. My expectation is that with some of the innovations we have arriving in the next year or so, that will only get stronger. We're quite excited about the chance to leverage the platform and the innovation on our existing customers. The trends we're seeing right now are excellent. Shawn, I don't know whether you want to add anything to that.

Once more, every single customer matters to us. Through our distinctive Design for Life approach, they'd remain with us for their entire lifetime, and those bonds are something we care deeply about. We're eager to bring them fresh experiences that bring them joy, let them expand their Sactionals in a backward-compatible manner, and in time move into additional categories the Designed for Life way. Honestly, there's only positive news here. Our customer list is something we treat with great seriousness and see as a key strategic asset for Lovesac.

From a business standpoint, our genuine thinking is this: we believe greater worth comes from digging far into the platform and introducing innovation than from tacking on additional categories when it comes to accessories. Usually, that's how we'll proceed. Delve deeply into the platform, create items that are essential to it, so you remain within your central business and grow more robust in it.

To build on that point, what strikes me as really interesting is the huge growth you've posted. Has your main customer base gotten deeper, or are you instead pulling in a wider range of people who are new to the brand?

Things have moved quite a bit over this year. My sense is that once the fourth quarter wraps up, we'll be able to share more specifics. Shifts in the demographics have shown up. With all the upheaval, a younger crowd has clearly arrived, particularly given the jump we saw online — that group looks somewhat different from our core. Broadly speaking, what we observe is that the business is performing well across every demographic, honestly.

Understood. Wishing you all the very best, everyone. Nicely done. Appreciate it.

Thanks so much.

Morning, and thanks for giving me the chance to ask a few things.

Morning.

To begin with, I want to congratulate you on an excellent quarter. Really impressive.