The Lovesac Company (LOVE) Earnings Call Transcript & Summary

Thanks. Morning, everybody. Joining me today are Shawn Nelson, our Chief Executive Officer; Jack Krause, President and Chief Operating Officer; and Donna Dellomo, who serves as Chief Financial Officer. Prior to beginning, please note that certain items we'll cover will contain forward-looking statements about upcoming events and how our finances will perform going forward. That covers statements regarding our expectations for the future, financial projections, plus our plans and prospects. Results in reality could vary materially from what those statements describe. To understand these risks and uncertainties, please look at the company's SEC filings, and today's press release is part of that. 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 no duty is undertaken by us to revise them unless applicable law requires it. Today's discussion will also feature non-GAAP financial measures, EBITDA and adjusted EBITDA among them; those non-GAAP measures ought to be viewed alongside our GAAP results, not as a replacement for them or on their own. 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 things over to Shawn Nelson, Chief Executive Officer of The Lovesac Company.

Thank you, Rachel. Good morning to all of you, and I appreciate you being here with us today. To kick things off, I'll walk through the key points from our second quarter results on both the financial and operational sides, and after that Jack will describe how we advanced on our main growth initiatives during Q2. Donna will then finish up our prepared comments by going over our financial performance and a handful of additional matters tied to our outlook. We're extremely happy with what we delivered in the second quarter, since the momentum we had in Q1 carried right into Q2, and we posted the largest quarterly growth rate we've ever recorded since becoming a public company. That came on top of a 28.7% increase in sales that we had reported for Q2 of last year. Our 65% growth rate for the quarter stands out even more once you consider that it comes after three straight years of a sustained 44% CAGR, with just a minor slowing in our growth rate during last year's pandemic period, even though showroom operations were limited at that time. Even when you look at it across a two-year span, the results we're producing are quite strong. In short, we attribute our ongoing success to the substantial strides we're making as a brand when it comes to awareness and conversion, all while carefully navigating the constrained supply chain conditions. We stayed in stock essentially at all times, getting virtually every order out directly to the consumer within just a matter of days. That held true through the worst of the pandemic and against a very unstable supply chain landscape. Customers are clearly seeing how competitively strong our distinctive product is, along with our standout in-stock availability, and that shows up in our Q2 numbers and in the market share we keep picking up. Given the demand strength layered on top of more strength that we're still seeing, we feel confident enough to experiment with new pricing and promotional approaches as a way to boost margins over the long run. Now I'd like to go over the highlights from our second quarter. Total sales came in at 102.4 million, a 65.4% rise compared with the same period a year ago, and that figure includes 290.9% growth in comparable showroom sales. We achieved total comparable sales growth of 39.5%, and we remain highly encouraged by how broad-based the strength is among both new and existing customers. We recorded solid growth throughout our showroom and other channels, while internet sales fell, which mirrors a shift back toward our showrooms now that they are completely open. Adjusted EBITDA rose substantially, hitting 12.4 million for the quarter compared with 2.2 million in the same period last year, mostly because of gross margin expansion, and we also benefited from SG&A leverage, which Donna will cover in more detail shortly. Our robust second quarter and first half of fiscal year '22 results keep reflecting a mix of a favorable demand backdrop and our own execution on key strategic initiatives, among them product innovation, effective marketing and merchandising approaches, inventive use of our showrooms and other channels to broaden customer touchpoints, and disciplined spending on infrastructure. Jack will go into depth about how our key growth strategies are progressing. So I'll limit myself to a few important operational highlights from quarter two. Let's begin with how our brand shows up through showrooms and channel partners. During the quarter, 7 showrooms were opened, and we stayed on pace to reach 28 in total for the year. An essential component of our omnichannel approach continues to be showrooms. Demand sales at Bestbuy.com are still strong, up 44.3% compared with Q1; our plan is to launch additional Best Buy shop-in-shops in this year's second half and into early next year, with preliminary intentions to add more than 15 shop-in-shops. On top of that, Costco road shows keep delivering solid results and surpassing what we expected. When it comes to product innovation, our teams continually generate fresh and inventive concepts that build on our Sactionals and Sac platforms. Two weeks ago, we marked the debut of the extremely limited-edition Sac covers made together with international fashion designer Jeremy Scott. Jeremy serves as the face of Italian fashion house Moschino and the Making the Cut TV series. Early sales are robust, and key placements include a few handmade Jeremy Scott cutters sac that are now reaching major celebrity names. Along those lines, exposure for this high-profile collaboration has already appeared through key outlets such as Us Weekly and Hypebeast. As for our major product launch, we intend to introduce and announce it before this third quarter ends. And we are thrilled to at last bring to market this long awaited new and patented innovation that we believe the Lovesac customer will be eager about. Turning to our marketing and branding efforts, the results of our marketing campaigns keep pleasing us; these initiatives are producing higher than expected marketing ROIs, based on what we regard as very strong leading indicators of brand strength. Jack will go into more detail on this. In relation to the widely discussed supply chain backdrop, we, like others in the industry, are dealing with supply chain headwinds, which we see as more temporary in nature. By making numerous tactical adjustments and pulling back on promotions, we have actively pushed gross margins higher in the first half of the year as a hedge against rising cost and bounce rate caused by container shortages and shipping inflation. As you know, we have purposefully and strategically established a geographically diverse supply chain, with manufacturing in Malaysia and Vietnam, along with China and Indonesia, as well as the U.S., to create redundancies we consider critical for ensuring short lead times and strong and stock positions. We have deep and tenured relationships with our partners and account for a significant portion of their business. To illustrate, in reaction to recent COVID escalation in Vietnam, our Vietnam manufacturer added more dormitories on site to house more employees who wished to voluntarily shelter on site and keep working through the pandemic to avoid shutdown. While just one example, it illustrates the importance of our business to our key vendors, many redundant geographies. In addition, over half of our vendors have been working with us for more than a decade. The robust connections we've built have given us distinctive advantages and enabled us to remain ahead as we deal with today's difficulties in the supply chain space. We're pursuing a range of measures to lessen the worsening supply chain obstacle; among them are shifting additional POs toward China, expanding our on-hand raw materials stock within the U.S., routing incoming freight through additional American ports and employing transload services, and utilizing air freight for our best-selling cover SKUs. Turning to ESG, we're eager to issue our inaugural formal ESG disclosures and report during Q4 of this year. We're also pressing forward with our circle to consumer, or CTC, approach, and intend to bring out additional premium sustainable manufactured product platforms spanning numerous categories throughout the home space, together with services and programs that will assist us in forging lasting ties with our most cherished customers. CTC represents the following stage past the DTC business model, in which the DTC model centers on getting goods straight to the consumer through the most effective means. CTC accomplishes the same, yet additionally demands a dedication to a circular approach to business that is more localized, looped, and oriented toward the long term. The CTC method of operating will not merely yield more sustainable results as time goes on, but it will also drive Lovesac to grow more competitive as a brand in the marketplace and more appealing to customers via our emphasis on long-term results. Our products already endure considerably longer than the majority and are therefore more sustainable in that respect, combined with programs that promote greater customer involvement and services that astonish and delight these treasured customers, we think we will not just maintain their engagement with us but can win them over through our upcoming wave of product launches that will continue for years ahead. Thus, to sum up, we are tremendously happy with our second quarter results from a financial as well as an operational standpoint. Our business is very favorably situated within the home furnishing category, and our ongoing robust results reflect not only the strong demand environment but, crucially, the outcome of our category disruption, industry-leading in-stock positions, and market share gains. As we consider the rest of the year, we anticipate the environment will stay dynamic, and we confront the same tight supply chain conditions you've heard so many discuss. Our diversified supply chain and mitigation tactics provide us with strong confidence in our capacity to steer through that difficult supply chain environment, while we stay concentrated on carrying out our key growth strategies to generate long-term value for all stakeholders. With that, I'll pass it to Jack to address our strategic priorities and progress. Jack?

Thanks, Shawn, and good morning, everyone. We're quite happy with how the second quarter turned out and with the progress we've made on our growth strategies, which I'll walk through now. Let's begin with number one, our efficient marketing and merchandising strategies. Even though cost per click has risen, our proven digital marketing strategies and tactics, together with newer efforts such as SMS marketing, hyperlocal advertising, and consideration advertising, are producing marketing ROIs that beat our expectations, based on what we view as quite strong leading indicators of brand strength. First, media ROI overall keeps coming in above our benchmarks, and brand health has grown enormously compared with pre-pandemic levels, especially in awareness and in perceptions of quality, value, and style among our target audience. When it comes to where purchasers become aware, the main drivers are TV and word of mouth, with word of mouth expanding at the quickest pace of all, and digital overall appears to be filling the top of the funnel more often than it did a year ago. Social CPM keeps climbing on our core channels, but better conversion rates have offset that. We anticipate continued cost pressure across media overall, yet we expect to offset it through improved conversion. A refresh of our TV and social creative is planned for the back half of the year. In addition, we have a testing plan for new social channels, among them TikTok, Snapchat, and Reddit. These tactics, combined with a stronger brand proposition and our advantaged inventory position, have let us both shorten and cut promotional campaigns and discounting by roughly 900 basis points versus a year ago in the second quarter, which is a major factor in helping us offset the supply chain headwind impacts. Our merchandising strategies are likewise generating ongoing mixed benefits, since customers keep gravitating more toward the premium priced, higher margin Love soft covers. On the omnichannel side, we've introduced additional automated touch points to support showroom conversion, among them a quote trigger email that launched in the second quarter. This has helped drive stronger showroom conversion, and the teams are jointly working to iterate, customize further, and find new areas where automation can be created for omnichannel success. Turning to showroom operations, we opened seven showrooms during the second quarter and are still on track to open 28 this year. Showrooms remain a key piece of our omnichannel strategy, and added capabilities such as on the spot scheduling and showroom post purchase specialists are improving the shopping experience. All through the second quarter, the post purchase specialist team kept widening its reach across both physical touchpoints and ecommerce customers. In Q2, those post purchase specialists spoke with over 90% of Lovesac customers whose purchases hit the predetermined dollar threshold for their service, and on average they generated a five point lift in post purchase CSAT for customers who engaged with a post purchase specialist compared with those who did not. Even with showrooms going back to their usual ways of doing business, customers keep taking advantage of one-on-one appointment services. Those appointments keep producing better outcomes than a typical walk-in customer, with a conversion rate above 40%, and they account for roughly 17% of showroom demand year-to-date. Our plan is still to try out the new customer touchpoint during the back half of the year by adding as many as 10 branded kiosks into our real estate strategy; at first, those spots will concentrate on trade areas where our core consumers live. Yet physical touch points do not represent our brand at this point. In addition, we will pilot a mobile concierge service across several markets; those will act as extra touch points too, in trade areas where we can capture incremental business in an asset light way. We keep watching the pandemic situation closely and put the health and safety of our customers and team members first. We gained plenty of knowledge in 2020 and have plans ready for a range of operating scenarios. Third area, expanding channel presence; we are quite happy with how strong the Costco business is, where we host our online roadshows right on the costco.com. Productivity has risen year-over-year, fueled by a growing premium cover offering and Love soft, and we intend to grow our digital presence with four shows and two Sac events set for the back half; beyond that, we are looking into possible physical touchpoints down the road as well. Our enthusiasm for the Best Buy partnership continues, and our expansion plans remain on schedule to open additional shop-in-shops during the back half and early next year, with preliminary plans for 15 more shop-in-shops. We have also watched our bestbuy.com business climb 44% compared with Q1 in terms of demand. That comes from better customer experience on bestbuy.com plus some marketing tests we have conducted. We will keep chasing opportunities with other partners. Area four, making disciplined infrastructure investments, beginning with ecommerce in the second quarter, where conversion rate rose 33% against last year, with the biggest gains coming in mobile conversion rate, the source of most of our traffic. Improving customer experience stays a priority, and in q2 we rolled out nearly 20 associated enhancements, most notably an upgrade to the product configuration experience, bringing in new technology to boost the visual quality of the product covers, making them far more lifelike in the 3D experience. One more major enhancement is adding Apple Pay to the checkout experience, which meaningfully shortens the conversion funnel for customers who use that payment methods. On supply chain updates, we keep making improvements in areas such as delivery, cutting costs, boosting efficiencies, and lowering risk; we have locked in extra space in Illinois, Pennsylvania, and California to stay ahead of holiday demand and next year's demand too. And notably, our footprint expanded by more than 45% year-over-year in the second quarter. We're still concentrating on putting money into inventory because the slow period has stretched out, and you'll see that reflected in our inventory numbers for the back half. Just like everyone else, we're dealing with pressure on freight and costs, shipments arriving late, and scattered, short-lived shortages of raw materials. As Shawn said, we've put a number of mitigation steps in place to counter this disruption. To wrap up, we keep growing both the brand and the business, as our solid results this quarter show, marking 14 straight quarters of at least 25% growth from the time we went public. Word of mouth is fueling our brand's momentum, producing the largest year-over-year gains in awareness. Meanwhile, our value proposition keeps strengthening, even with fewer promotions, and our teams have managed our inventory position really well. Looking toward the back half of the year, we'll keep pressing our competitive edge and make the most of our strong in-stock inventory position, together with an excellent value proposition and pricing, to get the best out of demand and margins. With that, I'll pass the call to Donna so she can walk through our second quarter financial results. Donna?

Thank you, Jack. Good morning, everyone. I'll start my comments by going over what we achieved in the second quarter, and after that I'll give you an update on the framework I laid out last quarter regarding how we're thinking about the rest of fiscal 2022. In Q2 of fiscal 2022, net sales rose by 40.5 million, or 65.4%, reaching 102.4 million, compared with 61.9 million during the same period a year earlier. Growth came from both our showroom channel and other channels. Those gains were partly offset by lower net sales in our internet channel, which was up against a prior-year stretch of elevated digital sales caused by pandemic-related showroom closures and a shift toward buying online. Showroom net sales climbed 49.7 million, or 387.1%, to 62.6 million in the second quarter of fiscal 2022, versus 12.9 million in the prior year period. The main driver was a $40.3 million rise in comparable showroom point of sales transactions, which came to 54.1 million in the second quarter of fiscal 2022, compared with 13.8 million a year earlier, reflecting limited showroom operations during the prior year because of COVID-19 plus a shift back toward in-person shopping. As a reminder, point of sales transactions represent orders placed through our showrooms, which doesn't always reflect the point at which control transfers to the customer and when net sales are recorded. We also opened 26 additional showrooms since the second quarter of last year, which contributed meaningfully to the increase in non-comparable showroom sales. Other net sales, which include pop-up shop and shop-in-shop net sales, grew 7.4 million, or 243.4%, to $10.4 million in the second quarter of fiscal 2022, compared with $3 million in the prior year period. That gain was tied to more online pop-up shop events this year and to the reopening of our shop-in-shop locations, which had been closed in the prior year quarter because of COVID-19. Internet net sales — sales made directly to customers through our ecommerce channel — fell 16.6 million, or 36%, to 29.5 million in the second quarter of fiscal 2022, compared with 46.1 million in the prior year period, with the year-over-year decline driven by comparisons against elevated digital sales in the prior year period and the channel shift back to our showrooms, all of which were open during the second quarter of fiscal 2022. By product category, sactional net sales rose 66.5%, Sac net sales rose 48.9%, and our other category net sales, which includes decorative pillows, blankets and other accessories, rose 192.6% over the prior year quarter. Turning to our gross margins. The 749 basis point gain versus the same period a year earlier came from several factors: a 506 basis point lift tied to fewer promotional discounts, greater net sales across the overall sactional product category, the mix benefit from premium covers, and reduced product costs stemming from vendor-negotiated tariff mitigation efforts made possible by higher volume. Distribution expenses came in 243 basis points better than the comparable prior-year stretch, reflecting 793 basis points of leverage in warehousing and distribution costs connected to larger net sales volumes; that gain was partly offset by a 550 basis point rise in inbound freight costs caused by escalating inbound container expenses, along with certain shifts that moved inventory purchases back to China, which face the 25% tariff rate. The reason for this shift is to help ease container congestion originating from our other overseas vendors. By diversifying our supply chain, we can stay nimble and move inventory purchases among vendors so that we remain in stock for most if not all SKUs. For the second quarter, we beat the net sales and gross margin expectations we shared with you on our previous call. The net sales gain came mainly from stronger sales volume during key events like July 4, paired with reduced promotional discounts in those periods. The higher gross margin percent in the second quarter of fiscal 2022 relative to our second quarter guidance and the prior fiscal year period resulted from ongoing efforts to mitigate supply chain headwinds, including cuts to promotional discounting issued in the first half of the fiscal year, which were made to help soften the projected gross margin hit from the rise in cost of inbound freight on the second half of fiscal 2022 that most if not all importers are facing. Beyond that, we also captured benefits from greater leverage on warehousing and distribution costs than originally projected, thanks to the higher net sales volume. The 51.3% year-over-year rise in SG&A was driven largely by higher employment costs, since we made some HQ and showroom hires that had been put on hold last year because of COVID-19; we also saw higher rent expense tied to the 26 additional showrooms and higher selling related expenses alongside the increase in net sales, partly offset by lower negotiated online pop-up shop fees compared with the prior year period. Overhead expenses rose mainly because of higher equity compensation expense, which resulted from an acceleration of expensing equity compensation tied to a trigger event in the second quarter, as well as infrastructure investments to support our continued growth. SG&A expense as a percent of net sales decrease 3.2% due to expense leverage in multiple areas, such as infrastructure investments, rent, insurance and selling related expenses, partially offset by deleverage and employment costs, equity based compensation and travel. The deleveraging of certain costs stems from business investments that had been paused during the previous year because of COVID-19, exactly as we had expected and as we talked about during our first quarter earnings call. In the second quarter, SG&A expense came in below what we had projected, largely because hiring at both our headquarters and showroom locations fell short of the levels we had planned for, and because some infrastructure investments got pushed into the back half of the fiscal year. Those shifts were partly countered by greater credit card fees tied to the quarter's higher net sales. Advertising and marketing expenses rose $5.9 million, or 81.9%, reaching $13 million in the second quarter of fiscal 2022, versus $7.2 million in the same period a year earlier, reflecting the restoration of marketing spending to drive sales growth now that showroom locations were fully open. As a share of net sales, advertising and marketing expenses represented 12.7% in the second quarter of fiscal 2022, compared with 11.6% a year earlier. That 116 basis point rise came from more media activity and higher media costs relative to the prior year period, which COVID-19 had affected. Depreciation and amortization grew by $100,000 over the prior year period, reaching $1.6 million, mostly because of capital investments in new showrooms. Operating income for the second quarter of fiscal 2022 was $9 million, versus an operating loss of $1 million in last year's second quarter, with the improvement coming from higher net sales and gross margin as well as the SG&A leverage I just described.

During the quarter, net interest expense came to roughly $45,000, mostly tied to fees on an unused revolving line of credit. For the second quarter of fiscal 2022, tax expense totaled $515,000, versus $34,000 a year earlier, which stemmed from minimum state income tax liabilities. Before we move on to net income, net income per diluted share, and adjusted EBITDA, please see the terminology and the reconciliation between each adjusted metric and its most directly comparable GAAP measure in the earnings release we issued earlier today. In the second quarter of fiscal 2022, net income reached $8.4 million, or $0.52 per diluted share, against a net loss of $1.1 million, or $0.08 per diluted share, in the prior year period. Adjusted EBITDA we generated came to $12.8 million < > in the second quarter of fiscal 2022, compared with adjusted EBITDA of $2.2 million in the prior year period. Now to our balance sheet: liquidity is still solid, as we closed the second quarter with $68.5 million in cash and cash equivalents along with 22.5 million in availability on a revolving line of credit, and outstanding debt on the revolver of less than $1,000 tied to the timing of ABL fees charged to the revolver. For additional details about our second quarter fiscal 2022 financial performance, please consult our earnings press release. On outlook: as we noted on our Q1 earnings call, we continue to operate in a pandemic environment, with a broader range of possible outcomes for fiscal year 2022. Because of that, no formal outlook for the full year is being provided, but we will give an update on the framework shared during that call, which we hope you are using to update your models; we are aiming for another year of strong sales growth, with approximately 28 showroom openings, and we expect to bring back expenses that were reduced in fiscal 2021 because of the pandemic. We will keep making infrastructure investments strategically to support the substantial multi-year growth opportunity ahead. With those added showroom openings and strong year-to-date performance, in a scenario where sales growth lands in the mid 40% range, we would anticipate adjusted EBITDA margins in the 6% to 7% range, with the year-over-year adjusted EBITDA margin decline driven by both gross margin pressure of approximately 150 basis points versus the prior fiscal year, as we, like others in the industry, face intensifying freight headwinds, as well as the expense and infrastructure dynamics I just discussed. We have been, and will remain, very disciplined on the expense side to help offset gross margin pressures. For our fiscal third quarter, we expect sales growth of approximately 50%, with negative adjusted EBITDA dollars in the $3 million to $4 million range, compared to positive adjusted EBITDA in the same quarter last year. Adjusted EBITDA is taking a hit from the gross margins we anticipated would be roughly 530 basis points lower compared to a year ago, driven by mounting supply chain pressures along with the push behind strategic expense reinstatements and infrastructure investments required to fuel the company's growth — things that had been paused during fiscal 2021 under our COVID-19 financial resilience measures; we continue to anticipate finishing fiscal 2022 with a solid cash and cash equivalent position, and we now see CapEx landing somewhere between $17 million and $18 million, based on our present outlook for 28 showroom openings during this fiscal year, compared with the earlier figure of 25 that we shared last quarter; so to wrap up, Q2 came in above what we had expected on both net sales and profitability. When we reflect on the past 18 months, what really stands out is how the remarkable Lovesac team members have executed — despite COVID and supply chain obstacles, they've delivered outstanding results; our pride in their excellent work couldn't be greater; and every one of us is concentrated on staying nimble and flexible as we keep steering through a dynamic operating environment and setting Lovesac up for sustainable long-term growth. With that said, we'd like to hand the call back to the operator, who can open things up for questions. Operator?

Morning. Clark Wright here, representing Tom Forte at D.A. Davidson. Appreciate you fielding these. To kick things off, from where you sit, do you believe shoppers have pulled back on what they buy for the home? Looking at it from our side, it appears obvious that people are putting more dollars toward travel, which the TSA throughput figures show?

Hi, Clark, Jack here, I'll take that first, and Shawn or Donna, feel free to jump in. So, given the disruption we're bringing to this industry, what we observe is that nothing industry-wide is showing up in terms of shifts in how people buy that ties to our brand. Like we talked about before, our conversion rates are at levels above anything prior, and I genuinely believe that means we're succeeding at the awareness-to-decision-making portion of the funnel, which sits further down than consideration, clearly; so even though certain things are going on in the broader macro market that have acted as headwinds or tailwinds for some rivals of ours sitting at more of a flat growth rate, we keep seeing momentum across every metric we track for brand health. That's why I'm unable to really speak to those sector shifts, since we simply cannot detect them inside our brand data at this moment.

Thanks. For my follow-up, even when supply chains are tough, you manage to deliver consumer couches quicker than rivals can. Would you say that edge has grown even stronger right now?

Yes, without a doubt, we're certain of it. Clearly, one aspect of buying a product involves receiving it, taking pleasure in it, and putting it to use. Plus, we keep achieving service levels that lead the industry, something we take great pride in, fueled by both a product with evergreen characteristics and a set of choices our teams made that truly positioned us with excellent inventory. So in this climate, it's plainly handing us an advantage over competitors that we're eager to capitalize on, since we remain — with a pandemic still occurring, our aim is simply to shake up the category and keep capturing share, which is exactly what we're accomplishing.

Thanks. Nice detail.

Thanks. Excellent quarter. Nice work on the numbers given such a difficult backdrop. First, I'd like to ask Donna whether you might break down what makes up the Q3 gross margin outlook, that 530 basis point drop — could you lay out the favorable and unfavorable pieces there? And could you also put a figure on how large the infrastructure expense was that got moved from Q2 into the back half? Then I have one more question.

Yes. Good morning. So yes, the favorable and unfavorable pieces on gross margin basically cancel each other out. The drag comes entirely from inbound freight; we're just like every other importer; right now our container costs arriving from abroad are up 85%; and a small portion of that also ties to our diversified supply chain, which actually works in our favor too. So in places where container congestion seems to be arising out of Vietnam, we can move inventory purchasing to our vendors in China. And we understand that tariffs affect the inventory arriving from China, but it lets us remain in stock on our inventory, which matters enormously to us and to our customers. We have been and we will keep cutting promotional discounting, and that helps us offset those costs. And overall, considering that 85% container increase, the effect, and how we managed to offset it during the first half of the year, having these costs flow through to the point where the year-over-year hit to our gross margin is only 150 basis points has been a very strategic outcome for us. Does that — does that cover that part, the gross margin question? And then on the — does that, Camilo?

Okay, so I just want to make sure I've got this right — you're saying that for Q3, overall gross margins declined by 530 basis points, taking into account everything you just laid out?

That's right. Yes.

All right. That makes sense. Then regarding the infrastructure spending, how much got delayed from what you originally expected in Q2 and now appears likely to land more in the back half?

Yeah. I don't have a precise figure. Given how close I am to the financials, my best estimate would be roughly $1.5 million. Beyond infrastructure investment, though, there's also the matter of timing around HQ and showroom hires. Delaying those hires wasn't a strategic choice — we simply want to ensure that the people we add to the team are A players. Our interview and onboarding processes are quite thorough, and at the start of the year we were likely overly optimistic about how many people we could bring on. So that piece falls under SG&A, and rather than a shift, I'd describe it as a save. It wasn't strategic — just timing. As for the infrastructure investments specifically, I'd say approximately $1.5 million was pushed into the second half of the year.

That sounds excellent, thank you. Then, Jack, you provided quite a bit of useful information regarding your marketing ROIs. Could you perhaps break out specifically how you are switching between more media — or maybe not media, but rather additional online marketing investment — when CACs are climbing, in order to keep driving traffic toward the upper part of the funnel?

Sure. At the top of the funnel, there are a few things. First, we keep gaining greater targeting capability by using channels such as OTT, which carries a steeper CPM yet performs very well. Beyond that, TV expenses broadly have risen, though what we observe is brand stickiness, as I said. Even with CPMs rising everywhere, our ROIs are climbing, and the reason, we firmly believe, is that brand stickiness — and the proof of it, I'd say, is word of mouth appearing out of nowhere to rank as the top driver of change and awareness compared with a year ago, which is fairly remarkable. That gives you favorable winds for your media efficiency at the upper part of the funnel. Clearly, the brand equity factors I mentioned before also produce efficiencies in the middle and lower parts of the funnel when it comes to conversion. So at the moment we're receiving plenty of favorable winds that are truly being produced by the brand simply growing stronger. Naturally, I cannot forecast how long this will last, yet we have definitely watched efficiencies keep proving out favorably for us even with an environment so far this year in which marketing expenses are going up.

Does that let you figure out whether you could maybe reduce how much you're spending while still getting the same amount of traffic coming in through word of mouth? And is that showing up in the surveys you run after purchase?

Well, we've definitely begun examining — and I believe we've kept doing so, as a share of the business, we've kept examining more digital, and digital grows a lot more crucial once we move into hyper-local marketing, no doubt about it. That goes partway toward addressing what you asked.

That's everything I had. Nice work, and best of luck carrying that momentum through the holiday season.

Appreciate it, Camilo.

Fantastic. Nice work on those impressive numbers, and I appreciate you fielding my questions. Regarding Q2 revenue, could you perhaps explain what was behind that quite robust beat relative to what you'd anticipated? You brought up how well things went around major events, but was there anything beyond that which diverged from your projections? Then I've got one more quick thing to ask.

I'd say the largest factor — and Donna and Shawn, Donna can likely give far richer detail on the specifics — but stepping back, we outperformed in the showrooms on both sides, and while those showrooms clearly posted really powerful comp gains, versus both LY and LLY, they absolutely came in above what we'd forecast. On the web side, it's welded since it's LLY, and those figures were stellar too, at 351; so my take is that our organic operation surpassed our projections, along with that business — pardon me, our business development segment, meaning the Costco and Best Buy piece as well. So honestly, we're witnessing momentum in every segment. We observe significant surges in momentum through promotional windows; my sense is that stems from escalating brand strength plus a favorable promotional backdrop that gets customers genuinely interacting with us throughout those windows. That represents a genuine opening for us moving ahead as we bolster our pricing proposition, and also aim to steer margins through the fourth quarter.

Understood. Thanks, Jack. And it kind of looks as though you expanded the customer base quite a bit across the last few quarters. Could you perhaps bring us up to speed on who your main target customer is at present and how that might have shifted as we come out of the pandemic?

Honestly, I wouldn't say our core customer has shifted all that much. We're bringing in plenty of new customers right across the spectrum, yet that core — the young parent who wants it all — remains essential to what we do, and the way they engage with us is genuinely the true signal of growth ahead. So with that segment, things are going extremely well. Awareness on our part is climbing sharply. Those young parent want-it-alls are the older millennials who are either shopping for a house or growing their family, and they sit squarely in our sweet spot. What I can share is that within that group, awareness hasn't just risen — so have engagement and familiarity with the brand values, plus the sense that Lovesac stands for what they believe in. So that pleases us greatly, and it stays our sweet spot.

Great. Thanks so much for the color.

Hi guys, thanks. I was wondering if you might be able to just discuss how trends have gone so far this quarter, relative to the 50% growth guidance you gave for the quarter? How was Labor Day, maybe just qualitatively at least, that would be helpful?