The Lovesac Company (LOVE) Earnings Call Transcript & Summary

Thanks. Morning, everybody. Joining me today are Shawn Nelson, our Chief Executive Officer, Jack Krause, who serves as President and Chief Operating Officer, and Donna Dellomo, our Chief Financial Officer. Prior to beginning, please let me note that certain items 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, projections regarding finances, plus our plans and prospects. What actually happens could differ materially from what those statements describe. To understand these risks and uncertainties, please look at the company's SEC filings, among them today's press release. You shouldn't treat any forward-looking statement we make as a forecast of what will occur. Every forward-looking statement offered on this call rests on assumptions and beliefs held as of today, and we take on no duty to revise them unless applicable law demands it. Today's discussion will also feature non-GAAP financial measures, among them EBITDA and adjusted EBITDA; such non-GAAP measures ought to be viewed alongside our GAAP results, not as a replacement for them or by themselves. A reconciliation linking 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.

Thank you, Rachel. Good morning to all of you, and I appreciate you being with us today. To kick things off, I'll walk through the highlights from our fourth quarter along with our financial and operational performance for fiscal 2021. Jack Krause, who serves as our President and COO, will then lay out the main growth initiatives we have planned for fiscal 2022. After that, Donna Dellomo, our CFO, will take a closer look at our financial results and several other matters tied to our outlook. Before we get into the results, I'd like to begin by expressing gratitude to the whole Lovesac team for their relentless work throughout what turned out to be a year unlike any other. Even against that difficult environment, fiscal 2021 proved to be a milestone year for Lovesac, one in which we posted record financial results and shifted our operations smoothly into a fully digital approach as pandemic-related showroom shutdowns hit. None of this would have been possible without the resilience and resolve of our teams. The COVID pandemic made it even clearer just how strong our people, our brand, our business model, and our operating platform are, and equally important, it produced lasting, value-creating lessons, fresh tools, and new customer insights that will inform how we make decisions going forward. At the worst point of the pandemic, we put in place a crisis management process and team so that we could make decisions quickly and in an organized way. Our approach to COVID rested on three main pillars: first, the health and safety of our team; second, the strength of the business; and third, financial resilience. Along those lines, as you'll remember, throughout March and April we shut all of our retail showrooms for a period and shifted to running as a web-only operation. To protect and put priority on cash, financial health, and liquidity, we reduced spending and working capital. We stayed nimble and produced very strong results by concentrating on serving what our customers needed. We hit a number of operational milestones during fiscal 2021. Among the most notable of these: we took advantage of the complete power of our omnichannel model by rapidly scaling up our digital capabilities; we brought a large number of new customers into The Lovesac family, and growth in our customer base should pay off for years ahead. We broadened both our brand awareness and our channel partnership to bring in Best Buy and bestbuy.com. We launched 19 showrooms over the year in spite of the difficult environment. We made our financial position stronger and closed the year holding $78 million in cash, which is $30 million more than the prior year. Even with the pandemic going on, and while raising sales by almost 40% compared with the prior year, we lifted our post-purchase customer satisfaction score by a meaningful amount, which meant happier customers and less friction; we also completed a record number of product demos, largely through Facebook Live and FaceTime messages, since most of our showrooms remained closed for a big part of the year. We rolled out a completely new website at lovesac.com built on a new, sturdier, future-ready platform that lets us scale, bring down operational costs, and operate with greater agility down the road. We brought out seven new quick-ship fabrics, which broadened our core product range to address more aesthetic tastes while distributing risk across redundant vendors located in multiple geographies. We completed many improvements to our internal processes, ranging from putting the Sac covers that customers buy most often inside Sac duffels — which lowers costs and lessens disruption when the product reaches the customer — to a host of supply chain steps designed to cut friction, curb shrink, boost accuracy, and generate operational efficiencies. Now let me walk through the highlights from our fourth quarter; total sales for the quarter came to $129.7 million, a rise of 40.7% compared with the same period a year earlier, and that figure includes 86.1% growth in e-commerce. Total comparable sales growth reached 45%, and we remain highly encouraged by the wide-ranging strength we see in demand for our products among new customers and existing ones alike. Adjusted EBITDA climbed more than 200%, reaching $25.9 million, which stands as our most profitable fourth quarter ever. This robust finish to the year mirrors ongoing strength in the demand backdrop along with our dedication to enhancing our offering, the customer experience, and our go-to-market position as we pursue greater share in an industry that remains heavily fragmented. For Lovesac, fiscal year 2021 represented a significant turning point toward profitability and positive cash flow on an annual basis. Navigating the pandemic, together with every challenge and tailwind affecting our industry, pushed us to be thoughtful about strategy, intentional and quick in making tactical adjustments, and strict in how we managed expenses while preparing for uncertainty. All of these elements combined produced a year that was possibly more profitable than our long-term plans had anticipated beforehand; we are pleased to take this decisive leap in profitability on a percentage basis, and we plan to keep growing the business in a profitable manner. That said, numerous investments in infrastructure and headcount were deferred and will occur in fiscal year 2022 to back our long-term growth outlook and our goals for capturing meaningful market share in this very large category. Despite our considerable growth, we believe we have still claimed only about 2% of the couch market so far. Viewed on a blended two-year basis, which better reflects our performance given how highly unusual FY 2021 was, a steady bottom line growth trajectory becomes evident, demonstrating our capacity to deliver profitable growth while we keep investing substantially in our infrastructure. Donna will go into more detail about our outlook and expectations during her remarks. Although we anticipate that the elevated top line growth rate from fiscal 2021 will moderate and possibly normalize in fiscal 2022, faster progress on each of our strategic priorities is essential to achieving growth and market share gains. Beyond the major product innovation so many are anticipating, on which I'll give an update shortly, we are continuing with ongoing new product introductions and enhancements across both our Sacs and Sactionals product platforms. Every innovation is designed to strengthen these platforms' capacity to draw in, keep, and grow our customer base, lifting average order value along with repeat business. We saw another good illustration of this strategy back in February, when we rolled out a brand-new Guest Rest Kit. It ships with its own mounting hardware, designed so it can be stashed inside a Sactional storage seat. That speaks further to how dedicated we are both to backward compatibility and to building complete Designed for Life platforms rather than standalone items. Packed in the Guest Rest Kit are a topper plus a sheet set, cut to the proper dimensions so that four Sactionals seats placed side by side transform fast into the snuggest sleeping arrangement for visitors staying the night — measuring about the same as a queen-size bed. Thus far, the Guest Rest has beaten the internal sales targets we set for its launch window. On top of that, during FY 2021 we brought out close to seven new quick-ship fabrics, which broadened what our core lineup offers so that more aesthetic tastes are covered, and that in turn fueled margin growth while lowering exposure tied to duplicate suppliers spread across several geographies. We have likewise just switched sourcing and reintroduced our well-liked Polylinen fabric, which now uses fiber spun out of recycled plastic, consistent with our Designed for Life philosophy and our dedication to sustainability. Coming in the product pipeline as well are exciting collaborations with third-party brands and co-branded items that we will reveal across the next few quarters. Every one of them is intended to generate business on the Sacs and Sactionals platforms, respectively.

Our enthusiasm remains high regarding the creation of and shopper feedback obtained via trials for the significant new product breakthrough we intend to bring to market during this year. It is our firm belief that this item will alter what people anticipate from our sector, enhancing even more our edge in competition for household offerings while expanding the overall market we can serve. That said, because of worldwide interruptions affecting the procurement of essential parts, our scheduled release date now carries uncertainty. Our priority is to introduce it once inventory levels are adequate to satisfy anticipated buyer interest, since we do anticipate this debut will matter considerably for upcoming sales. It's possible we won't manage to release it during the opening six months of this year, contrary to what we said earlier, yet we aim to make an announcement sometime within the current fiscal year and will share additional details as soon as we gain clarity; turning to ESG, Lovesac's dedication to environmental responsibility has long been a cornerstone of the mission and approach we have articulated. Learning that cumbersome furnishings account for nearly one-third of non-organic refuse in dumps left us appalled. Sactionals first appeared in 2006 as an eco-friendly answer that could additionally be shipped and handed over with greater efficiency, plus remain serviceable across many years, whereas numerous other goods nowadays aggravate buyers because they are deliberately rendered outdated or unfashionable following just a handful of years. At present, Sactionals stand as the finest illustration of our Designed for Life, or DFL, approach put into practice and are right now fueling the bulk of our swift expansion annually; this DFL approach demands items crafted to endure an entire lifetime and built to adapt alongside the user's evolving circumstances. Customers appreciate our goods for this highly pragmatic rationale and purchase them typically with a far-reaching perspective; it's a competitive benefit that has assisted us in building a distinctive brand, a profitable enterprise, and a thriving culture right here at Lovesac. Our enduring dedication to such sustainability tenets is evident not just in how durable our goods are, but also via our continuous sourcing initiatives. To illustrate, our relatively recent shift to producing 100% of our upholstery fabric from recycled plastic bottles has already positioned Lovesac as the top-volume consumer brand in the United States recycling plastic bottles into fabric for home decoration. Via such endeavors, we have already given new life to over 100 million bottles so far, and our effect keeps multiplying alongside our swift expansion. We are delighted to reveal that we will before long be in a position to disclose further specifics backing the outcomes of our endeavors in this area with the publication of our inaugural industry standard sustainability report by Q4 of this year. By gathering and monitoring pertinent data across our entire supply chain and operations, we will set reference points against which we intend to achieve continuous enhancements. Also, being a trailblazer in the home space, Lovesac aims to turn into the front-runner, champion, and head of what's coming next. Moving past the widely praised DTC approach, in which we already rank among the acknowledged pace-setters in our sector, we refer to it as the CTC approach, Circle to Consumer, and we think it will both turn into a crucial point of distinction for our brand and benefit the planet as well. CTC is a round business approach that we came up with. CTC pulls pieces from the wider circular economy push, in which a company creates and keeps products alive for a long lifespan while at the same time creating services and rules designed to forge and sustain long-term lifetime ties with buyers. This direct selling approach, paired with more direct operational schemes and rules, can create a stronger bond with customers. Through this CTC approach, we aim to roll out additional premium, responsibly produced product platforms spanning several categories throughout the home arena. We'll also wrap these items with many inventive services, including at-home advice, assembly, decorating, personalization, subscription and upkeep offerings, peer-to-peer swapping, secondhand sales, restoration, and remanufacturing schemes that we think will reinforce Lovesac's ties with buyers, our brand value, and bolster a circular industrial system. We see this all-encompassing, self-reinforcing loop approach as the sole one able to deliver genuine sustainability. Though our goals stretch far, we're ready to advance gradually and commit sensibly across a very extended horizon so we can keep expanding swiftly and lucratively as we strive toward this aim. Using Designed for Life as our distinctive method for product creation and Circle to Consumer as our operational creed, we aim to attain a 100% circular and sustainable business approach, hitting objectives of zero waste and zero emissions by 2040. We think this distinctive way of conducting business, paired with these concrete aims, can render Lovesac even more set apart, streamlined, competitive, and lucrative, thereby assisting us in reaching our declared mission of turning into the most cherished home brand on the planet. We'll share far more about these objectives and our CTC strategy in the months and years ahead. You'll start to notice it mirrored already in certain fresh operational moves we're making even during this year, a few of which Jack will detail today. To sum up, we're hugely happy with our fourth quarter and full year outcomes, delivering substantial growth on both the top and bottom lines, including record fourth quarter profitability. We think these outcomes mirror the draw of our platform and our robust rigor in running the business through an unpredictable stretch. We're incredibly proud of how our team effectively steered through a tough operating climate, shifting to satisfy our customers' evolving requirements and to seize the heightened appetite for this category, while at the same time pushing forward our strategic efforts and forging a superior, more flexible Lovesac. I want to praise all of them, and I feel such appreciation for how they bounce back and their unwavering dedication to taking care of our customers. What we accomplished in fiscal 2021 puts us in a good spot to take advantage of the ongoing chances we see for our brand in fiscal 2022, when our projection for the home category for the rest of this year is solid. That's thanks to macro tailwinds we think will help the category, such as robust home sales, nesting, and de-urbanization. We believe we're positioned nicely to grow market share, deliver ongoing robust sales growth, and do so profitably. At this point I'll hand the call to Jack so he can go over our operational progress for the fourth quarter and the full year, along with what we have planned for fiscal 2022.

Thanks, Shawn, and good morning to all of you. The impressive results we posted for the fourth quarter, along with how we performed across the entire year, reflect just how solid our business model is and how nimble our teams have been. For the full year, total Lovesac sales rose 37%, powered by the strength of both our showroom and web channels, where transactions climbed 32% and AOV rose 11% compared with the prior year. Let me now provide a brief operational update covering both showrooms and channel partners. At present, every one of our showrooms has moved into the walk-in phase, with heightened health and sanitation protocols in place. Turning to channel partners, our Best Buy shop-in-shops keep delivering strong results. As we shared earlier, in the fourth quarter we broadened our partnership with Best Buy so that Sactionals are now sold on bestbuy.com; we launched our fourth Best Buy location during March, and we intend to grow the shop-in-shop footprint with Best Buy across the second half of this year and into early next year, with initial plans calling for more than 15 additional shop-in-shops. Our Costco business declined, which was anticipated because of fewer physical roadshows. That said, momentum in higher margin programs contributed to lifting gross margins for our other segment as a whole to 44.6%, a gain of 500 basis points from the same time last year. We wrapped up our Macy's test when the year ended, aiming to concentrate on developing the shop-in-shop concept alongside Best Buy and other possible partners that offer the ability to scale efficiently. The fourth quarter gave us a robust finish to financial year 2021, with solid operational headway on our key priorities, and we intend to extend that headway in financial year 2022. Allow me to update you on how we're doing in the key areas and what we have planned for the year ahead. Since Shawn already covered product innovation, I'll begin with our efficient marketing and merchandising strategies. We held our customer lifetime value, or CLV, to customer acquisition cost, or CAC, ratio at 4.7x during financial year 2021, despite advertising and media spend rising 44% to $41.9 million for the year, which shows both the efficiency and the scalability of our marketing and customer acquisition strategies and the strong returns they keep generating. Our fiscal 2021 customer cohort produced a record average first-year value of $2,044 for each new customer. We see this as a result of our emphasis on increasing penetration of Sactionals. Total customer count rose 32.9% in fiscal 2021, and we saw a robust 48% gain in new customers on the Sactionals platform, and both of those things are encouraging for what lies ahead. As we've noted previously, our showrooms act as excellent amplifiers for our brand and for the return on our marketing spend. Leveraging that synergy, we intend to launch another 20+ showrooms during fiscal 2022, and four of those have already opened in February. Thanks to our solid median brand momentum and a fairly accommodating competitive landscape, we were able to run fewer promotions during financial year 2021. On top of that, our merchandising approaches have assisted in generating a greater AOV by shifting product mix toward premium and higher margin covers. Building on what we learned in the second half of fiscal 2021, we anticipate continuing to generate additional efficiencies and strong returns from what we spend on marketing. During financial year 2022, we will stay focused on employing additional tactics that expand reach and deepen penetration of our target customer through nonlinear buys such as Hulu and OTT, and we will keep scaling into those platforms while aiming our linear buy at achieving greater reach. We are likewise observing chances to grow our digital spend as customers devote more time to digital research for their home furnishing purchases. Now shifting to our showroom operations. In the fourth quarter, we launched one showroom in Hoboken, New Jersey, and closed the year with 108 owned showroom locations in total. As we keep evolving our real estate touchpoints, we are piloting a number of new initiatives during this year, among them mobile concierge, a mobile showroom that lets us deliver a demo to the customer inside their own home. We also intend to test kiosks too, along with an additional off-mall pad sites. Such touchpoints will supplement our core showroom strategy, and we will keep you informed about how these plans roll out as our pilots advance through the first half of the year. We think this asset-light method of building touchpoints will let us work cross-functionally far nearer to the customer, boosting customer satisfaction and offering robust support for upcoming Designed for Life and Circle to Consumer initiatives that Shawn discussed earlier. As part of our ongoing emphasis on better safety and productivity, we experienced ongoing success from our on-the-spot appointment scheduling during the fourth quarter, which allowed us to more effectively harness the strength of our omnichannel model. We hosted more than 11,000 appointments in Q4, a rise of 27% versus the prior quarter, and experienced strong sales conversion that grew sequentially, leading appointments to represent 46.4% of the showroom business. In Q1 of this year, we intend to test an environment in which customers located in e-commerce-only areas can have a virtual appointment with our showrooms, letting us get even nearer to the customer no matter where they happen to be shopping from. As part of our dedication to CTC operational excellence and the post-purchase experience, we additionally piloted a showroom post-purchase specialist program during the fourth quarter. This team concentrates on proactively communicating with customers at key milestones across the customer's delivery experience. Throughout this pilot, we exchanged more than 34,000 messages with our delivery customers and observed a significant rise in post-purchase customer satisfaction among the customers who worked with a post-purchase specialist. We keep refining this program with a pilot in the first quarter of this year, and we will update you regarding our planned expansion of this program later in the year. Regarding growth in other channels and sales, I’ve already given you an update on what we’re doing with Best Buy. We keep looking for chances with additional partners, and once there’s something worth reporting, we’ll share it. Last, we’re putting money into our infrastructure in a careful way, covering both technology and supply chain. The results from our new e-commerce platform have made us happy; beyond higher traffic compared with a year ago, we experienced a disproportionately large lift in conversion rate on transactions. Like any site, we aim to keep refining things according to what customers tell us and shifts taking place inside the business. lovesac.com matters a great deal in the customer journey, since buyers are devoting more time to the site to learn about the brand and our products prior to going to a showroom. As we just went over, the make an appointment feature has been a notably significant software release. How people shop after the pandemic is different, and our omnichannel integrations have positioned us nicely to make careful e-commerce technology investments during the next fiscal year, with particular emphasis on the product configurator and the post-purchase parts of the customer journey, because customers are becoming more at ease buying premium priced products online.

When it comes to the supply chain, our ongoing emphasis remains the customer journey from the moment an order is placed through delivery, while lowering expenses, boosting efficiency, and lessening risk throughout that chain. Alongside our Chicago DC hub, we keep growing our distribution footprint, adding as much as 600,000 sq ft of new space across California and Pennsylvania, which lets us take advantage of outbound transportation costs in additional trade areas. Right now, the entire industry is dealing with raw material shortages and port delays, and managing those issues and lowering supply risk rank as our leading priorities for this year. Beyond bringing our holiday inventory forward into the first half so we can steer clear of holiday congestion, we are reviewing other ways to speed up the expansion of our distribution network. When it comes to supply, we keep bolstering our manufacturing operations in Vietnam, Malaysia, Indonesia, China, and the United States. Last, our new supply chain ERP system, slated for implementation by the end of the year, will let us scale our capacity to manage in stocks through improved order management, supplier management, planning and replenishment, and end-to-end tracking capabilities. To sum up, we are extremely happy with how we performed financially and operationally in fiscal 2021, and we remain enthusiastic about what lies ahead; we take great pride in the fact that our overall customer satisfaction scores finished the year substantially above where they stood at the start of fiscal 2021. That genuinely demonstrates our capacity to stay agile and serve customers' needs. Even during a year in which our consumer continually shifted their preferred journey and shopping preferences. Although these gains came from numerous improvements, they genuinely mirror our tireless dedication to serving our customers better, especially during the post-purchase portion of their journey. The ever-changing conditions of the last year held back some of the investments we had planned for the business, and we are putting those back in place this year as we resume our plans to invest in and build the capabilities and infrastructure needed to generate sustainable and scalable growth. Looking toward fiscal 2022, we remain aware of the uncertainty created by the continuing pandemic, along with supply chain dynamics affecting the whole industry. Still, we feel confident about what is within our control, the longer term path of our business and the potential of our brand; we are happy with our progress and more dedicated than ever to building the Lovesac business to satisfy customer needs and our own vision of creating a more sustainable business model through Designed for Life and Circle to Consumer initiatives. With that, I'll hand the call over to Donna to go through our fourth quarter and full year financials along with a few details regarding our fiscal 2022 outlook.

Thanks, Jack. Hello, everybody. I'll kick off my comments by going over what we achieved in Q4, and after that I'll lay out the framework for how we're thinking about fiscal 2022. Net sales rose 40.7%, reaching $129.7 million, and that came from robust expansion in our internet channel, up 86.1%, plus the ongoing strong recovery in our showroom channel, up 28.4%. Partly working against that was an 18.7% drop in other sales. That decline mostly happened because there were no Costco in-store pop-ups in Q4 of this fiscal year, versus 206 during the same quarter a year earlier, tied to continuing vendor negotiations. Three temporary online pop-ups on costco.com partly made up for that, against two in last year's fourth quarter. Total comparable sales — covering internet channels, net sales, and comparable showroom point-of-sale transactions — grew 45% for the quarter, reflecting an 86.1% rise in internet channel net sales and a 22.6% gain in comparable showroom sales. All the specifics on our comparable sales performance are in our earnings press release. Looking at product category, Sactionals sales were up 48.8%, Sacs sales were up 6%, and our other category — decorative pillows, blankets, and other accessories — was up 18.1%. Gross margin improved 890 basis points versus the prior year period, reflecting 508 basis points of improvement in gross profit from a reduction in promotional discounts, reduced inventory reserve levels, and lower product costs tied to higher vendor negotiated tariff mitigation initiatives because of higher volume. Distribution expenses — warehousing, freight, and tariff-related expenses — also got better by 382 basis points over last year's quarter, thanks to higher leverage on warehousing and freight costs, including tariffs. We beat the fourth quarter gross margin expectations we gave you on our last call, mainly because of less promotional discounting. On top of that, we saw benefits from lower inventory reserve levels and additional vendor rebates driven by higher volume, partly offset by slightly higher freight and warehousing costs from a shift in the timing of inventory receipts out of the prior quarter. SG&A rose 30% year-over-year, driven largely by higher employment costs, more expenses tied to infrastructure improvements, increased credit card fees from higher internet and showroom sales, increased equity compensation, increased rent associated with a higher showroom count, and increased insurance expenses related to the growth of the company. Those increases were partly offset by a decrease in in-store pop-up shop fees, since no in-store pop-up shops took place in the fourth quarter, as well as a decrease in travel expenses due to COVID-19 related travel restrictions. When looking at SG&A as a share of net sales, that figure dropped by 230 basis points. The main driver was a reduction in selling-related costs tied to in-store pop-up shop fees. That decrease was partly offset by temporary online pop-up shop fees, plus expense leverage on rent from our 108 showrooms and on travel costs. Further offsetting came from deleverage in employment costs, equity-based compensation, insurance, and credit card fees, all connected to the company's growth. SG&A expense came in below what we had expected, largely because hiring was delayed relative to the level we had anticipated for the fourth quarter, both at headquarters and in showroom locations. Advertising and marketing investments, which pay off over extended periods, rose by $5.1 million, or 60 basis points, reaching 12% of net sales in the fourth quarter. That reflects more national media spend focused on holiday media, expanded direct-to-consumer programming, and continuing to run 15-second spots within our television advertising mix. Depreciation and amortization rose $70,000 versus the prior year period, hitting $1.6 million, mostly from capital investments in new and remodeled showrooms. In the fourth quarter of fiscal 2021, operating income reached $21.8 million, versus operating income of $5.3 million in last year's fourth quarter, powered by the net sales and gross margin gains along with the SG&A leverage I just mentioned. Net interest expense for the fourth quarter came to roughly $45,000, mostly from unused line fees on a revolving line of credit. Tax expense in the fourth quarters of fiscal 2021 and 2020 was not material and relates to minimum state income tax liabilities. Before we move on to net income, net income per share and adjusted EBITDA, please see the terminology and reconciliation between each adjusted metric and its most directly comparable GAAP measurement in the earnings release we issued earlier today. Net income was $21.7 million, or $1.37 in diluted earnings per share, in the fourth quarter of fiscal 2021, versus net income of $5.4 million, or $0.37 diluted earnings per share, in the fourth quarter of fiscal 2020. We generated positive adjusted EBITDA of $25.9 million, compared to adjusted EBITDA of $8 million in last year's fourth quarter. Shifting to our balance sheet, liquidity remains strong: we closed the fourth quarter with $78.3 million in cash and cash equivalents and $15.9 million in availability on our revolving line of credit, with no outstanding debt on the revolver. Please check our earnings press release for details on our full fiscal 2021 financial performance. As for our outlook, we continue to operate in a pandemic environment with a wide range of potential outcomes for fiscal 2022. Because of that, we're not giving a formal outlook for the full year, but we will share a framework that should be helpful as you update your models. We're aiming for yet another year of robust sales growth, with more than 20 new showrooms opening, and we anticipate bringing back expenses that had been cut during fiscal 2021 because of the pandemic; on top of that, we're investing in infrastructure to back the considerable multi-year growth opportunity ahead of us. If sales growth lands somewhere in the low to mid 20% range, our expectation would be a gross margin rate consistent with fiscal 2021 and an adjusted EBITDA rate in the mid-single-digit range, with a year-over-year margin rate decrease caused by the expense and investment dynamics I just described. Turning to our fiscal first quarter, which wraps up in just over two weeks, we're looking for sales growth of roughly 38%, a modest gross margin rate gain versus the same quarter a year ago, and an adjusted EBITDA dollar loss comparable to that same quarter last year, which stems from strategic expense reinstatement along with infrastructure investments that had been paused in fiscal 2021 as part of the COVID-19 financial resilience measures we took. We anticipate generating cash from working capital during fiscal 2022, and we expect CapEx to fall within the $13 million-$16 million range. To wrap up, we delivered a very strong fourth quarter on both a net sales and profitability basis during an unprecedented fiscal year, having achieved significant progress across every area of the business. We'll keep building on that momentum in fiscal 2022 and beyond as we position Lovesac for long-term growth, creating value for all of our stakeholders; with that, we'd now like to hand the call back to the operator, who can open it up for questions. Operator?

Morning, everyone. I appreciate you fitting in my question—or perhaps questions. To start, I want to say congratulations on such a strong quarter and such a strong year. Well executed.

Thanks.

For my first question, I want to discuss gross margin. In Q4, we saw yet another incredibly strong result. Donna, you provided certain parameters regarding the Q1 outlook and for the entire current fiscal year. My question is this: when we examine what drove that significant gross margin improvement in Q4, and especially the factor you highlighted in the press release—reduced promotions—how should we view whether those various drivers can persist?

Morning, Brian. A quick reminder about the fourth quarter: it falls between the third and fourth quarters, and during these periods our volume rebates arrive. It is in these quarters, mainly Q4, that we reassess inventory reserves. We enjoyed some benefits larger than expected from our ability to rightsize inventory reserves, plus the advantage of securing extra vendor rebates. What we do view as sustainable as we move into Q1, Q2, and the remainder of the year is the reduction in promotional discounting, which I'm certain Jack will elaborate on a bit more. The improved product margin mix that we can take advantage of is likewise sustainable throughout this year; those represent the two most significant factors as we head into Q1 and Q2, and Q3 and Q4 too. I'd describe those as the elements, along with the limited guidance—or rather, the framework—we gave for fiscal 2022. Those advantages will assist us in maintaining the margins we achieved in fiscal 2021 as we proceed into 2022 for the entire year, even though we face certain headwinds related to freight, which, as you know, is on everyone's lips. On the bright side, the initiatives we currently have underway are what will enable us to offset those freight headwinds. I hope that addresses your question.

No, that's useful, that does help. For my follow-up, Shawn, you brought up the product launch once more. I suppose I just want a clearer picture of when that's happening, because I didn't — perhaps it slipped past me in the remarks.

Yeah.

Regarding the outlook, or the framework, that you provided for sales growth during the current year, what does it include, and how much of an expectation is there for some kind of performance from the new product? Sorry, Shawn, please go ahead.

Yeah. To start with, our sales guidance for this year contains no expectation for how the new product will perform. We do anticipate being able to announce and launch the product during this fiscal year; to that end, we've kept our outlook conservative. Until we have a firm understanding of precisely when we'll be in an inventory position to support our expected sales, we'll simply delay the announcement of that product until that time. We do expect it to be in this fiscal year.

Got it. Thank you. Congrats again.

Thank you.

Brian, one more point from me on that: I simply want it to be understood that the 20% scenario we provided isn't really guidance. It's only a reference point for you to construct a framework around. I just want that to come through clearly.

Yeah. We hear you.

Okay, great.

Excellent. Congratulations on those solid results, and I appreciate you taking the questions. I'd like to revisit the topic of gross margin growth. More generally speaking, what are you observing when it comes to consumer behavior, or perhaps the competitive environment, that is now permitting you to offer fewer discounts over the last two quarters? I have one brief follow-up.

Absolutely. Thank you. Appreciate the question. This is Jack, obviously. A few points. First, the promotional climate looks benign to us; we've observed this, particularly when you consider that several of the more premium labels going after the same kinds of shoppers we go after are all describing a benign promotional backdrop. We're also noticing much higher conversion rates moving through our funnel, and I believe that points to considerable stickiness along with brand momentum that we're achieving. Beyond that, obviously we can't say precisely what will occur in the second half, but at this moment we feel quite positive regarding the trajectory and the ROIs that we're witnessing. We keep also achieving gains in gross margin via product mix and by having our quick ship fabrics procured at better margins, which has been essential to our business too. There remains a learning agenda for us. We have additional chances to pull levers should we identify opportunities, and we'll keep you updated.

Understood. That's quite useful. Now perhaps regarding advertising, could you discuss how you're approaching the balance between national investment and a more regional strategy that targets particular markets? And maybe more generally, any perspective on brand expenditure compared with direct response as we move toward 2022? In the past, you mentioned achieving better advertising ROI in areas where showrooms exist. Has that shifted at all during the last year or so?

There are many questions packed in there, so I'll begin with the latest one. We're observing major effects from touchpoints in generating our overall revenue and our ROI. The approach around touchpoints matters as much as it ever has. What I believe the current environment pushes us to consider is how to get more efficient at building touchpoints where customers can try the product, sense its quality, and reach their final choice; we keep seeing synergies emerge from touchpoints. We keep seeing better ROIs in markets with a greater number of touchpoints. Actually, if you examine the year closely, using two-year stacked comps, you'll notice considerable momentum building across all quarters, and it's precisely when we get a big increase in e-com that we might observe a slight decline in physical touchpoints, yet the reverse also happens. They genuinely reinforce one another and are increasingly interdependent, particularly when you consider the journey. At this point the journey is so interwoven that distinguishing a digital journey from a physical one is truly difficult, and I believe the crucial thing will be how we become smarter at managing it over time. Regarding how we evaluate our markets, we definitely assess them based on ROI per market and efficiency, and we act on that. National spending is extremely efficient and keeps enabling us to achieve the breadth of communication we require. That said, we're noticing that higher amounts of digital spending work very well in markets as we concentrate on growing those markets. What I think you'll observe is an ongoing blend of national and digital. They also complement each other. Clearly, national spending operates more at the top of the funnel, and once we reach the middle of the funnel, those digital expenditures truly assist us in getting it right. At present, even though we're seeing overall costs rise at the national level for media, I think that due to, you know, the economy recovering, along with brand stickiness and digital efforts boosting our conversion rates, we genuinely perceive a sustained positive in our ROIs when considering the mix of national and local spending.

Great. I appreciate you fielding my questions. I have one main question plus a follow-up. Shawn, thinking big picture, what pace of innovation are you aiming for, and that includes both the major kind and the minor kind? And when it comes to displaying new products to shoppers, what part does the showroom play?

Yeah, the rate at which we innovate is unchanged. Our aim is, you know, about every 2 years to be able to release something significant, and in the gaps keep doing small step-by-step innovation, which lets us raise our average order value and lets us keep making the platforms stickier, more compelling, and more competitive within the landscape. That hasn't shifted at all; clearly, as a public company, we'll kick off our major innovation launches with the one we keep discussing for this year, and once we've got a solid handle on the timing, we'll come back with further updates, and again we expect that during this year. Regarding what the showroom does in getting these launched, that is truly the entirety of our approach; we create things. The products we create using this Designed for Life method for product design are extremely distinct. Despite the fact that they're designed to resemble the items we know well — and Sactionals is the finest illustration of this — it appears to be a sectional sofa yet functions in a very, very different way and calls for a certain amount of hands-on comprehension. Showrooms, or perhaps touch points is the more accurate term, as Jack mentioned, and if you caught some of the points he raised, we've got many fresh touch point strategies coming to light that will be quite thrilling and will let us launch additional items at Banfield.

Great. So for my next question, Shawn, I'd like to get your latest perspective on growing beyond the U.S., which includes the chance to move into English-speaking countries such as Canada and the U.K., whether through a Lovesac showroom format or maybe a shop-in-shop approach, or the possibility with Costco warehouses.

That's a wonderful question. This is a topic we remain enthusiastic about; it's a topic we keep studying, and it's a topic where we aren't ready to reveal our specific plans, except to state that at some point it will occur. We offer items that we believe could connect in numerous other countries. We hold patents for a lot of these items that have been submitted and granted across the globe, and we keep securing additional patents internationally too as we get ready for that, though there's nothing to share at this time.

Excellent. I appreciate you fielding my questions.