The Lovesac Company (LOVE) Earnings Call Transcript & Summary

Thanks. Morning, everybody. With me today are our CEO, Shawn Nelson; Mary Fox, who serves as President and Chief Operating Officer; and Donna Dellomo, our Chief Financial Officer. Before we dive in, a quick reminder: some of what we cover today will include forward-looking statements — things tied to upcoming events and how our financials will look down the road. That covers our expectations going forward, our financial projections, and our plans and prospects. It's possible actual results will differ materially from what those statements describe. To dig into the risks and uncertainties, please check the company's SEC filings, including the press release we issued today. Don't treat our forward-looking statements as forecasts of what will happen. Any projections we share during this call rest on the assumptions and beliefs we hold as of today, and unless the law requires otherwise, we're not committing to revise them later. We'll also be talking about non-GAAP financial metrics today, such as EBITDA and adjusted EBITDA. Those non-GAAP figures are meant to be viewed alongside our GAAP results — not as something that replaces them or stands apart from them. You can find a reconciliation showing the closest comparable GAAP measures next to those non-GAAP figures in the supplemental financial information included with our press release. At this point, I'd like to hand things over to Shawn Nelson, who serves as Chief Executive Officer of The Lovesac Company.

Thanks, Rachel. Hello, everybody, and I appreciate your presence this morning. We'll begin today by going over the key points from our Q1 Fiscal 2023 results, after which we'll talk about how well-positioned Lovesac is in this industry. Following that, Mary Fox, who serves as our President and COO, will bring you up to speed on what we accomplished regarding our strategic initiatives during this quarter. And then Donna Dellomo, our CFO, will walk through our financial outcomes along with several additional matters tied to our outlook, with greater detail. Jack Krause, our Chief Strategy Officer, is here as well and will take part in the Q&A session. Let me turn now to a few notable points from our first quarter financial results. We feel great about how the first quarter turned out, with revenue and earnings both coming in above what we had anticipated, even against a shifting macro environment. Total sales reached $129.4 million, an increase of 56% compared with the same period a year ago. Our total comparable sales rose 42.2%, and we remain highly encouraged by the widespread momentum coming from both new and returning customers; once again we experienced robust gains in our showroom, Internet and other channels. In particular, we lifted adjusted EBITDA to $6.4 million, compared with $5.3 million during the prior year period, even with 450 basis points of gross margin pressure caused by supply chain headwinds, and Mary and Donna will provide further specifics on that. I'd like to pause and explain why we think we have delivered, and will keep delivering, bigger growth at a steadier pace than a large portion of our category. Lovesac isn't a furniture retailer. Lovesac isn't merely a direct-to-consumer marketing engine, offering clever seating solutions amid a sea of similar furniture. What defines us at our core is that Lovesac is a branded consumer products company. We offer proprietary home furnishing inventions that outperform all comparable products in usefulness, durability and sustainability. We sell exclusively direct to the consumer via our website and physical touch points, which include shop-in-shop partnerships that we run ourselves. What this means is that our method of conducting business — covering product, pricing, go-to-market strategy, insights and even talent — differs from everyone else in the home furnishings category; we seek to create enduring and significant relationships with every customer; and thanks to this direct-only model, we hold a robust collection of data and insights on each of our customers. Our goal is to build a brand grounded in product platforms, rather than one constructed around a wide merchandising assortment containing thousands of products, or one that primarily competes on aesthetics, as most of our rivals do. This strategy produces outcomes for our business that are fundamentally unlike those of the category. Consequently, Lovesac's business performance and customer experience weren't exposed to some of the fluctuations that certain peers faced across the various phases of COVID. I want to walk through 3 key distinctions that fuel the dependable results we deliver, and to make the case that these advantages will keep serving us well as other macro pressures and distortions emerge. To begin with, our method lets us keep making our product platforms stronger by investing without letup in research so we grasp what our customers want. We come up with fresh ideas and platform extensions that none of our rivals has ever imagined. Rather than endlessly pursuing new seasonal styles and collections driven by what a merchant thinks will sell, we put those ideas through testing and refine them so they win right out of the gate. Our entire focus is on creating a product that serves our customers' present and future requirements by growing the platform alongside them; we'll bring that same method to additional home product categories, and most recently, that means home audio. What our research tells us is that among our target audience, Lovesac's brand perception is "a good value for my money," that this perception beats our core competitive set, and that such perceptions rose year-on-year in Q1 FY '23. The value perception we're generating is climbing faster than the prices we've raised. Second, since what we sell is a branded product platform rather than mere commodity furniture set against light commodities, each Sactional we move represents a genuine chance for those buyers to introduce our brand to friends and family, and that's exactly what they do. Ours are genuinely distinctive products, and their most distinctive qualities are genuinely novel and easy to show off right there in the customer's living room. They understand how to use and adjust their Sactionals because they weren't simply handed a delivery and a setup; they personally had to configure, cover and possibly even hook up StealthTech with their own two hands; that's potent and disruptive, given that our rivals sell countless unbranded couch lines, every one with narrow appeal or similar perks; that explains why close to 1/3 of our customers in the purchase phase report learning about Lovesac through a friend or family member. Each product we sell turns into a marketing asset that's ours alone, since our own customers put our broadly appealing product on display and demonstrate it inside their own homes. Finally, seen from an operations standpoint, this concentration is a vital edge over the category. Obsolete inventory is simply not a concern for us. Scale's advantages get applied across these few core products rather than many, and the people on our team genuinely grow into experts on what we build. Those scale advantages show up in how resilient our supply chain is, how efficiently we carry inventory and spend on marketing, among other things; this method is what lets us feel confident about ongoing success in the categories where we compete, and we'll bring it to the new categories we choose to enter afterward. We've shown we can innovate our way successfully into new home categories, having picked one of the most technologically intricate ones to pursue first after Sactionals, namely home audio. Judging by how StealthTech has performed so far, we feel sure that in the course of time, we'll capture considerable market share, and at the same time we're developing the next platform for release; we hold strong conviction in our capacity to produce elevated growth along with profitability that keeps getting better each year, since the business scales up quickly with size and scale, even when macro headwinds or disruptions hit everyone competing in our category. Furthermore, we think the characteristics of our distinctive model can offer a degree of protection against such possible disruptions, just as they have during the last few years. To that end, we're dedicated to delivering results as evidence. Let me now give a summary of where we stand in the present climate. It seems macro headwinds have grown stronger over the past several months, and we've only noticed demand softening during the most recent few weeks. Our operations remain grounded in a position of strength, as shown by the 56% topline growth we posted in the first quarter, which speaks to our sturdy business model and the pull of our momentum-driven brand; we think we remain in the early majority stage of the adoption curve for Sacs and Sactionals alike, which their expanding strength from word-of-mouth demonstrates. Our newest StealthTech launch is only now moving into the early-adopter stage of that very curve and still has far to travel.

We're still in stock and shipping almost every order straight to consumers within days, while lead times across the industry from other soft seating sellers can stretch several weeks or perhaps months behind schedule; keeping inventory on hand and short lead times remains a competitive edge for us, lifting Lovesac's brand affinity and customer satisfaction during a period when numerous other brands are generating some friction and letdown. Our record of steady strength and performance stretches across the pre-pandemic, pandemic, and post-pandemic periods, and we've achieved substantial gains and awareness. Put simply, the business is performing at full power. Over the 4 years since our IPO, trailing 12-month sales have multiplied fivefold. We've moved trailing 12 months EBITDA from negative territory into the double digits; and despite this enormous growth in topline sales and the matching increase in marketing spend, our CLV to CAC ratio has risen from roughly 4x to 5.3x. I couldn't be more proud of how the whole Lovesac team has executed. With the backdrop we face, I realize plenty of people see a possible recession on the horizon and are focused on how consumer-facing companies could perform through one. Lovesac was a much smaller operation back in 2008, yet here's why I feel optimistic about our capacity to beat the competition if we do move into a recessionary environment. First, our product platform is designed to last and is utilitarian by nature; it represents an investment and leans more toward a need than a want, purchased purely for aesthetic reasons. Second, because we remain so early on our adoption curve, we're fueling growth through market disruptions and share gains, so brief market contractions might affect us less than they would more mature brands. Third, we cater to a younger, upper middle income demographic that takes pride in what we stand for regarding our dedication to sustainability. These shoppers earn well and resist inflation more than those purchasing at the lower end of the market, without the same heavy wealth-effect impact that participants at the highest end of the market might feel in a volatile market. Fourth, our balance sheet is rock-solid; and fifth, we were far smaller during earlier market pullbacks and receptions, yet even then, the pure momentum of our exceptionally high growth rate, though it was even higher in times of abundance, let us grow right through those pullbacks and even seize other opportunities to further disrupt the category that arise at moments like these. Turning to the rest of the year, though we're quite pleased with our Q1 performance, given the recent uncertain macro backdrop and the fact that we're only one quarter into the year, we aren't revising our full year outlook right now. We stay very confident in the future of the Lovesac brand and its expansion; we're an agile and skilled team that has built this business organically through lean times before and through every sort of headwind. My view is that we're capable of steering successfully through any set of market conditions that comes our way. The first quarter was excellent. We achieved meaningful operational strides on our expansion efforts, which keep fueling Lovesac's superior financial results. I want to express gratitude to the whole Lovesac crew for their unwavering effort and commitment to our brand and shoppers. Absent them, delivering such a robust showing wouldn't be achievable; and having said that, I'll pass things along to Mary so she can walk through our strategic priorities and how they're progressing. Mary?

Thanks, Shawn, and good morning to all of you. The results for our first quarter set a record for Q1 here at our company. As Shawn mentioned, Q1 was outstanding. With these numbers in hand, we've now put together 16 straight quarters of growth above 25%, plus a 48.7% CAGR across the last 4 years, picking up meaningful market share each quarter; over just the last 2 years, our comparative sales have doubled, and they've nearly tripled when measured on a 3-year stack basis. All of this growth came while keeping a sharp eye on profitability, with our adjusted EBITDA margin rising 440% over the past 4 years. Over the last three years, the home sector we operate in has seen a lot of ups and downs. When COVID first hit, shoppers pivoted toward online buying, which really hurt brands with lots of physical stores. Then more recently, the pendulum swung back toward brick-and-mortar, and that hurt our rivals who lean heavily on e-commerce. Because of all that, what we point to as our true report card is how consistently we've outperformed for 4 years running — gaining share each quarter and meeting our financial promises. The credit belongs to Lovesac's strong word-of-mouth and cultural relevance, our top-tier omnichannel go-to-market approach, and our habit of being first to market with new ideas. We're confident that these share gains and this level of brand recognition will continue. Reflecting on the unique omnichannel approach we take to market, I'm excited to share news today regarding the strategic relationships we've formed with retailers Costco and Best Buy. Because our products are advantaged and our selling space is productive, we're able to forge ties with other top-tier retailers, extending our reach in intelligent ways so that we can serve and grow our customer base in locations where people often make other big-ticket purchases yet wouldn't typically anticipate finding furniture; we're quite pleased with the strength of our Costco business, as we've run roadshows right on costco.com over the past 24 months. Another thing we're glad to announce is that in Q2, and continuing through the remainder of the year, we will bring back our in-person roadshows. That gives us a big chance to boost revenue and, even more crucially, lets our intended buyers see our physical setup firsthand as they keep shifting back toward shopping in person. Those roadshows performed tremendously before COVID, and we can't wait to get them going again. Over at Best Buy, our business has been growing quickly, and we credit that to a better customer experience on bestbuy.com along with solid StealthTech results, especially inside our shop-in-shops. Our collaboration with Best Buy still has us enthusiastic, and we intend to keep widening and growing our presence there. That covers making StealthTech an even better experience, since it fits so naturally with what the Best Buy shopper wants. Now I'll move on to how we did in the first quarter. Like Shawn said, we're quite happy with these record results and with the progress we've made on our main strategic growth initiatives, and I'll go through those now. First up is product innovation, and the biggest story there is still our StealthTech launch, which happened in the middle of October '21. StealthTech's continued strong performance makes us feel great. Because this is an innovation unlike anything before it, we expect adoption to keep rising quarter over quarter. As our presence expands inside Best Buy as well, we're enthusiastic about what's possible when it comes to enhancing the StealthTech experience — one that holds a real advantage thanks to Best Buy's stores, reaching the home audio shopper right where they browse, and building out bigger joint initiatives to boost familiarity with our Best Buy alliance. In addition, as part of the StealthTech plan timed to land around National Streaming Day, we teamed up with Disney+ to improve how the app feels for at-home viewing, spotlighting the biggest movies and series arriving on that streaming service. Shoppers can stop by Lovesac showrooms or pick Best Buy to discover how Disney combines with the creative StealthTech sound and charge home audio systems, setting up the perfect family movie night. Second, smart approaches to marketing and merchandising. Looking at the KPIs we monitor, we keep identifying the traits that set our brand apart and resonate with our main target shopper. Those take in essential measures like brand awareness and quality, bringing home electronics into the mix, operating as a company centered on sustainability, delivering the coziest seating, and mirroring each customer's individual style, along with other important metrics. On top of that, how our media performs in-market is moving along as we anticipated, and overall media costs are starting to level off, apart from a few areas like search and remarketing; because of that, we've been able to get back to more testing and growth into further creative initiatives, cookie-less solutions included. Finally, customer referrals keep giving us a tailwind. Over the previous quarter, for shoppers who reached the buying stage, we think word-of-mouth served as the biggest source of awareness. That helps our company, and it also amounts to a powerful vote of confidence in our brand coming from the people we serve. Third, our mid-channel operations, which will bring together touch points and e-commerce. As with plenty of other companies, more shoppers went back to buying in person across quarter 1, and we started noticing a channel swing back toward physical touch points away from e-commerce. Since omnichannel mattered to us well before COVID, we've positioned ourselves to respond nimbly to such changes with no disruption. Through building a seamless business model in which sales associates earn compensation for sales they influence via any online or physical channel, we've shown that where a sale happens makes no difference to us. Touch points and e-commerce rely on each other, and the majority of our shoppers used both across their purchasing journey. Now I'll go over a handful of ways we keep advancing this business strategy. The first is digital marketing. During quarter 1 FY '23, we pushed harder toward bringing traffic into touch points, since we know shoppers who get a demo in a showroom convert at a better rate. When it came to the first quarter, one thing we did was roll out Google local, which relies on Google beacon traffic and tracking to bring customers into the nearest store, and that accounted for 60% of our search impressions. More than 70% of what we spent on social media went toward trade area marketing, which pushes shoppers located within a trade area to visit their nearby showroom for a demo, or, for those outside a trade area, to buy online. Another first-quarter addition was the use of targeted digital advertising to bring customers in for StealthTech education and conversion. Since StealthTech is mostly bought at touch points, these efforts brought customers to touch points so they could try an audio experience demo. Finally, we brought on a group of post-purchase specialists, created specifically for customers who bought through lovesac.com. Bringing this team on let us add a personalized touch for our digital customers, and during quarter 1 these specialists reached 98% of lovesac.com customers, plus over 90% of our omnichannel customers. Turning to our touch points, showrooms remain a key piece of our omnichannel strategy, producing strong results, as shown by our quarter 1 comp of 53.2% and our 2-year comp of 235.9%. Through these touch points, customers can see, feel and now hear our distinctive product offering.

During the first quarter, our traffic increased by 70% compared to last year, and in comparable locations it was up 33% versus a year ago, which considerably beat the U.S. trends that ShopperTrak, our national reporting system, has reported. What's even more striking is our productivity in sales per square foot, which leads the industry, with just Apple and Tiffany ranking above us based on the latest data available. In Q1 we launched 17 new touch points, and we remain on track to hit our FY '23 goal; we added 11 new showrooms, 1 new Best Buy shop-in-shop, and 5 new kiosks. We keep seeing robust results in lifestyle at the off-mall sites and intend to aggressively chase comparable chances as part of our real estate strategy that keeps evolving. Out of the 11 showrooms we opened during quarter 1, 82% are located off-mall, mostly consisting of lifestyle centers or street locations. Taken together, our new touch points are exceeding what we expected, and we have confidence in the real estate pipeline we've built through our strategy. Recognizing that touch points can also matter greatly in how customers shop with us, we've stayed committed to putting money into our teams via staffing and compensation. During quarter 1, we brought on a team dedicated to bringing in top talent for the field organization. We're also making strategic investments in compensation, staying conservative with base pay while concentrating on increasing variable pay tied to performance, which gives us flexibility to fine-tune payroll and boost service levels. We trust in our capacity to staff and back our ongoing expansion, and we recorded a 10-point drop in open field positions in Q1, along with retention results that lead the industry, all balanced against demand with 80% of field roles being part time. When it comes to e-commerce, our sales and traffic climbed year-over-year despite the unusually large results from last year as the pandemic went on. We keep pushing forward with our continuous enhancements and our test and learn approach to make the customer journey on our website as good as possible. We're eager to be looking into technology upgrades that we think will improve the customer experience even more this year, and we'll update you once we have more to say; and last, we're making disciplined investments in infrastructure. On April 15 we were pleased to announce Todd Duran as our new Chief Information Officer, and we intend to keep expanding his IT team. Todd and his group will be essential in providing a customer experience that generates higher satisfaction, and I'm delighted to watch him get off to a fast start. Now for supply chain updates. In Q1, we kept gaining from our diversified supply chain and inventory strategies, which allowed us to not only beat expectations on net sales in quarter 1, but also finish the quarter in a solid planned inventory position, with quarter ending in stocks in the high 90s, a strong position we anticipated going into quarter 2 with our evergreen inventory. When it comes to how quickly customers receive their orders, we keep setting the standard within our sector, and that commitment isn't going anywhere. Turning to quarter 2, we anticipate further operational gains even with persistent obstacles across the worldwide supply chain. Because we take an active approach to inventory management and source from multiple places, our supply performance has been stronger and more consistent up to this point, and we'll keep steering through today's conditions while still hitting the margins we've projected. Another thing we're glad to see is the headway being made as we keep reducing certain China tariffs and expanding manufacturing in North America — together these build and reinforce backup capacity so our leading in-stock standing stays intact. To wrap up, quarter 1 brought financial and operational results we're happy with, and my enthusiasm about this year's opportunities only grows as we roll out more of our strategic growth plans. These impressive numbers show how well the whole Lovesac team has executed, and we're deeply grateful for the dedication and enthusiasm they bring each and every day. They also speak to the power of our brand as we keep steering through a shifting operating landscape. Confidence in the business's fundamental direction is high, and we're restating our guidance for the year. Our position is strong for carrying on market-share gains and riding the wider wave of shoppers drawn to a mission-led brand built around sustainability. At this point I'll hand things to Donna for a look at our quarter 1 results plus some specifics tied to our fiscal 2023 outlook. Donna?

Thank you, Mary, and good morning to all of you. I'll start off by walking through what we saw in the first quarter, and after that I'll lay out a framework for how we're thinking about the rest of fiscal 2023. Net sales rose $46.5 million, or 56%, reaching $129.4 million during the first quarter of fiscal 2023. Growth across every channel drove that year-over-year rise in net sales. Comparable sales as a whole climbed 42.2%, thanks to how well our Easter holiday campaign performed in both showrooms and on the Internet, along with the year-over-year expansion of our touch points, now including 31 showrooms, 13 kiosks, 2 mobile concierge and 18 Best Buy shop-in shops. On top of that, we saw better productivity from our online pop-up shops on costco.com, where we held one more event than we did a year earlier. Showroom net sales came in $32.3 million higher, up 65.9%, at $81.3 million for the first quarter of fiscal 2023; that gain stemmed mainly from a $22 million rise in comparable showroom point-of-sales transactions, which reached $63.3 million in the first quarter of fiscal 2023 versus $41.3 million during the same period last year, largely fueled by a very strong Easter campaign. Just to remind everyone, point-of-sale transactions reflect orders taken through our showrooms, which doesn't necessarily match the moment control passes to the customer and when net sales get recorded. When we look at our direct-to-consumer e-commerce business, net sales there climbed $6.1 million, which works out to 24.1%, reaching $31.3 million during the first quarter of fiscal 2023, versus $25.2 million in the same period last year. The primary driver was the way our Easter campaign turned out. As for other net sales — a category that is largely made up of pop-up shop and shop-in-shop net sales — those increased $8.1 million, a gain of 92.7%, hitting $16.9 million in the first quarter of fiscal 2023, compared with $8.8 million during the prior year period. The main reason was better productivity from our temporary online pop-up shops, one additional costco.com pop-up shop, and the greater number of Best Buy shop-in-shops we had relative to last year. Turning to what we sell, Sactional net sales increased 55.4%, Sacs net sales climbed 67%, and our other category — decorative pillows, blankets and other accessories — saw a 39.1% rise versus the same period a year earlier. Gross margin percentage fell 450 basis points from last year, driven largely by about 640 basis points of higher total freight costs, which include inbound and outbound freight, tariffs and warehousing. Those costs were partly offset by a 190 basis point gain in product margin, largely from reduced promotional discounting and ongoing vendor negotiations aimed at helping mitigate tariffs; we beat the first quarter net sales guidance we gave you on our previous call, mainly because our Easter campaign succeeded and shipment volume came in higher than we had projected. Our gross margin percent for the first quarter of fiscal 2023 came in above our guidance, largely because inbound freight costs were lower than we had anticipated. The rate piece came in where we thought it would, but container arrivals were pushed back because of supply chain headwinds and port shutdowns during Q1, which meant cost realization was delayed. The key point is that we anticipate those deliveries showing up in Q2, and the upside is that the redundancies built into our system meant CSAT scores and customer delivery times did not degrade at all. The favorability on freight rate is partly offset by a somewhat higher discount, mostly because our Easter campaign performed tremendously well. SG&A rose 46.2% year over year, mainly from higher employment costs tied to the new hires and variable compensation, plus greater rent expense from adding 46 touch points and higher percent rent linked to the sales increase. We also took on overhead expenses from infrastructure investments, and selling-related expenses went up chiefly because of credit card fees tied to the sales increase. On the earnings call, the company reported that SG&A expense, measured as a percentage of net sales, declined 230 basis points. This improvement resulted from better leverage in several areas: infrastructure investments, rent, equity-based compensation, selling-related expenses, and insurance. Those gains were partially offset by deleverage in employment costs and travel. Employment costs and travel deleveraged because the company continues to invest in the business to support its ongoing growth. Advertising and marketing expenses increased $5.2 million, or 48.9%, reaching $15.9 million in the first quarter of fiscal 2023, compared with $10.7 million in the prior year period. That increase stemmed from continued investments in marketing spend and awareness campaigns intended to support sales growth. On the advertising and marketing side, we saw those costs come in at 12.3% of net sales during the first quarter of fiscal 2023. In the same period a year earlier, that figure stood at 12.9% of net sales. This modest decline in basis points is attributable to better results from our media initiatives. Turning to depreciation and amortization, it climbed by $200,000 year over year, reaching $2.7 million, largely because of capital investments made this year in new showrooms and kiosks. Operating income was $2.6 million, up against $2.3 million in last year's first quarter, with the factors I just walked through driving that. Net interest expense landed at $35,000 for the first quarter, identical to what we recorded in the first quarter a year ago. The bulk of interest expense is tied to unused line fees associated with our revolving line of credit. Before we get into net income, net income per diluted share and adjusted EBITDA, I'd like to point you to the terminology and the reconciliation between each of our adjusted metrics and their most directly comparable GAAP measurements, which you'll find in the earnings release we put out earlier today. In the first quarter of fiscal 2023, net income came in at $1.9 million, or $0.12 per diluted share, versus net income of $2.1 million, or $0.13 per diluted share, in the prior year period. The company recorded $700,000 in provisional income taxes during the first quarter of fiscal 2023, compared to $200,000 in the prior year period. During the first quarter of fiscal 2023, we utilized $500,000 of deferred tax assets, which was based on the taxable income we expect to generate for fiscal year 2023. Adjusted EBITDA came in at $6.4 million for the first quarter of fiscal 2023, compared with $5.3 million in the same period a year earlier. Let's move on to the balance sheet. Our evergreen in-stock inventory is a benefit because it doesn't consist of seasonal goods. So we don't face the danger of carrying too much stock or needing to lean on promotions to bring inventory down. Our inventory positions match our projections and our aim of fueling our growth while keeping the industry-leading in-stock positions we're known for, and close to 50% of the rise in the ending balance sheet inventory on a year-over-year basis was tied to freight costs on the inventory we built up. The higher inbound freight costs are a reflection of what's still happening with the global supply chain; we expect the pace at which our total inventory balance is growing year over year to slow by the time the year ends. We remain well positioned from a liquidity standpoint: at the end of the first quarter we held $64.4 million in cash and cash equivalents, plus $31.2 million available under a revolving credit facility, and we had drawn nothing against it. Our earnings press release has further details on our financial results for the first quarter of fiscal 2023.

Turning to what lies ahead, conditions remain fluid, and for fiscal '23 there's a broader spread of possible results. Because of that, no formal guidance for the year is being issued, though we are restating the framework for fiscal 2023 we gave you during our fourth quarter earnings call: greater than 25 showroom openings plus ongoing infrastructure spending meant to back the considerable multiyear growth opportunity in front of us. Should net sales growth land in the low 30% range, our expectation remains that gross margin rate will sit only about 300 basis points under fiscal 2022, and in that same scenario adjusted EBITDA margin rate comes in a bit above fiscal 2022 levels even with reduced margin rates and infrastructure spending; with net sales rising in the low 30% range, we anticipate gaining leverage on certain operating expenses. Cash generation from working capital is still anticipated in fiscal 2023, with CapEx between $20 million and $22 million; for fiscal second quarter 2023, net sales growth should come in at 25% to 30%. Though comps aren't something we guide to, a few qualitative remarks on the quarter to date are worth making; strength persists across products that over-index to higher-end consumer demographics, with StealthTech as a prime example; at the opposite end, among our more entry-level product, some moderation has appeared. As a result, comps have eased from the very strong Q1 levels, yet they remain up in the healthy double-digit range, giving us confidence to reiterate our full year outlook. On profitability, for the second quarter of fiscal 2023, adjusted EBITDA margin should decline roughly 355 basis points versus the prior year period. The main pressure on adjusted EBITDA margin comes from higher SG&A leverage, which lower gross margins of approximately 710 basis points year-over-year — tied to elevated inbound ocean freight rates and greater outbound transportation costs from higher fuel surcharges — are expected to more than offset; to wrap up, we are very pleased with our first quarter fiscal 2023 results that exceeded our expectations on both the top and bottom line. Those results continue to reflect the consistent contributions of the entire Lovesac team and we are grateful for their hard work; we look forward to building on our success in fiscal 2023 and beyond. With that, we would now like to turn the call back to the operator who can open it up for questions. Operator?

Shawn, Mary, Donna — an outstanding quarter. My first question, then a single follow-up. Shawn, you touched on this during your prepared remarks, and I'd never wish a recession on anybody; still, it strikes me that a downturn could be exploited in these ways: cheaper container rates, cheaper freight rates, cheaper component rates, which let you pick up prime real estate at appealing rates, plus lower advertising rates; so is that the right frame? And what, if anything, am I overlooking?

Yes. Thanks, Tom. Lovesac has numerous avenues for resilience when things pull back. We've been through such periods before; ours isn't a young firm, though our explosive growth rate might make it look that way; and to start, the plain momentum behind our growth rate can carry a business like ours through all sorts of pullbacks and headwinds, since a headwind facing strong momentum might slow it, yet it definitely won't halt growth, and that gives us encouragement; and then everything you listed — going all the way back to 2008, when Lovesac had just a few dozen stores, we managed to grab locations at far better lease terms, and our leverage with suppliers, throughout supply, naturally, grew. That's because when so many businesses stall, growth turns precious to both the vendors who may feed into the shipping firms down the line, we hope; and firms such as ours will truly collect the benefits that flow from entering with momentum and from having so much room left in our category, even as we become, in many respects, the apex predator of couches as we see it, the disruptor holding the category's finest product. And so — yes, everything you named is correct, and we're eager to seize those advantages should some significant market pullback occur; for now, out of an abundance of caution, we've reaffirmed guidance rather than, say, raising it, since it's a crazy world out there, and we simply want to stay extremely conservative and careful about what's expected, yet we keep growing and growing quickly and doing so profitably, and we're genuinely pleased about that.

Great. Alright, and for my follow-up question — I have to give a shout-out to Jack, congratulations on that fantastic quarter too. Okay, I don't believe I've raised this topic in quite a while, but could you outline your approach to M&A? My sense is that plenty of chances exist right now to acquire assets at lower prices. And beyond that, what's your view on operating with multiple brands, whether that comes via acquisitions or by starting up a second brand?

Sure, I'll offer a couple of comments, and Jack can chime in since he follows me. To add to what we just discussed, during periods of uncertainty, assets do get less expensive. And M&A isn't included in our core outlook. As you're aware, we've expanded via organic growth for quite some time and hold a highly optimistic view about our ability to keep growing organically at extremely strong rates. That said, on the front end, since other direct-to-consumer brands exist that haven't reached our level of strength and profitability or a dependable business model, there are always possibilities we're at minimum examining and considering. More significantly, though, we hold tremendous ambition regarding what we can accomplish on the manufacturing side when it comes to reducing costs and building greater capability there. We've developed a product offering the greatest room for cost reduction. It's a uniform product line with few SKUs that stays constant at its foundation; and what we can achieve via manufacturing expertise also presents us with many possibilities, in our view, to treat M&A as a way to start strong from a manufacturing perspective. But once more, we aim not to get sidetracked given our substantial growth rate; so we remain opportunistic — and we'll stay quite cautious on that front; we hold a great deal of cash relative to our size. And I believe that remains something we can consider when it comes to multi-brand. I'll let Jack chime in, but we think there are countless possibilities inside the home, correct? We see our domain as spanning from your mailbox all the way to the back wall or fence of your property. And everything within that space is ours to disrupt. And naturally, we'll pursue the expensive, significant items first, and do so with a designed-for-life philosophy meaning built-to-last lifetime, designed-to-evolve. Could there be spin-offs, could there be product categories, they're so large that they could even become their own brand or company, absolutely. All of these are things we consider; regarding the lower end, it's not something we see as necessary from that brand, so to speak, splitting our brand to, so to speak, reach a lower-end demographic or even higher-end demographic. Sactionals is a democratic product. That's a beautiful — as an illustration of a demand-to-life product. There's an option to purchase them bare — meaning no covers at all — and then use them that way, adding components gradually, one at a time. Alternatively, you can get them completely outfitted with top grain leather covers, which runs you more than buying the individual pieces. So even though our price point sits at the premium end, we think we're able to reach a very broad set of buyers; and we've barely started doing that, since the core demographic is so dense. What we're targeting represents such a large opportunity. Despite reaching roughly $0.5 billion in sales last year, we've only grabbed a tiny slice of the market so far. That share is so small that — with a single product category that we keep concentrating on — but I'm not sure, Jack, what more you could contribute here?

Appreciate it. I suppose that's 2 — Shawn, you're putting it into 2 different buckets. First, for the coming 3 to 5 years, it's obvious we've got a lot of organic runway with Lovesac, and we understand that thanks to what our consumer insights, our research, and our new product pipeline tell us. In the near term, the way I view my role, working alongside Mary and the team, is figuring out how to tighten up our process, our structure, and governance so we can extract the maximum from the ideas flowing through the pipeline. Then the second bucket, I'd say, looks past 3 to 5 years, at what DFL opens up for us and the affinities it creates with future customers. There's a tremendous amount we're evaluating, given how strongly DFL resonates with our core customers. As time passes, I think we'll be in a position to share more about the filters we're applying. But great question.

Congratulations on those really impressive numbers. You brought up a number of elements behind the momentum in Q1, and your Easter campaign was among them. I'm curious whether there's anything more you'd call out, perhaps from a competitive angle or in how consumers are behaving, that might have contributed to sales or results during the quarter? Then for my follow-up, turning to your guidance. You noted some softening of demand over the past few weeks. Could you possibly put a figure on that against the 56% growth we saw in Q1?

Sure, Maria, I'll handle that. Thanks so much. On quarter 1, clearly, the results made us very happy, as you pointed out. What stood out to us was especially how well our Easter campaign did; I believe that truly builds on the word-of-mouth momentum Shawn talked about before, plus the brand stickiness that keeps growing. Another thing I'd point to is the Google local effort we rolled out in quarter 1, especially tied to the Easter campaign; we simply watched traffic grow into showrooms and convert online; that helps keep us highly visible when shoppers are considering a purchase, so we stay top of mind; that momentum kept right on going; and I'd say StealthTech keeps gaining traction, with a lot of enthusiasm. Even looking at other channels in quarter 1 at 92%, you can see that demand continuing to expand. Now to your quarter 2 question. A few pieces of context worth keeping in mind: quarter 2 this year faces our toughest comps against the prior 2-year stack, and it's the largest quarter of the year. Then, when you factor in that comparables get easier as we move into the back half of the year, we're really up against that — that bigger figure. So the moderation, a big chunk of it, really traces back to that comparable. We still see quite strong demand that has carried on as we've moved into Q2; but we're also clearly paying attention to and watching every macro force in the market and being very careful with our guidance to ensure, as we always do, that we deliver and perform at the highest standards we've maintained for the last 4 years. I'm not sure, Donna, whether there's anything more you'd like to say about Q2?

No. Mary, you did great.

I'd also like to offer my congratulations on a solid Q1. So, for my first question, and this will be somewhat of a follow-up to the question that just came before, about the remarks concerning a slowdown here in Q2; so you said it appears to be concentrated more on the lower end of the product continuum, if you will. Can you provide any additional color regarding what you're observing? Sort of when it began, and to what extent — I suppose, obviously, the depth of it, so to speak, of the slowdown? So I suppose the next thing to ask is this — should that trend keep going, what options might you use to counterbalance it, options available inside the Lovesac business model? And I have another question after that.

Yeah, sure. I'll answer that one, and then Shawn or anybody else is welcome to add something. So Brian, I'd say the main point is that, clearly, we just finished a really powerful first quarter, and April was part of that and was especially strong for us. When you compare us to competitors out there, nobody matches our outcomes, and our share keeps growing. So when we discuss the slowdown we mentioned, I'd caution that it applies only to a portion — specifically how the quarter began. Like I said before, the comparisons we're facing are the hardest ones across a two-year stacked timeframe. Those comparable figures drop off considerably as we move into the back half. When it comes to how much of that moderation stems from that comparison versus the dynamics other companies are experiencing, we'll clearly find out how it plays out. Still, we feel really good about the ongoing expansion we're seeing across every one of our channels. You can see those growth rates cited, with customers arriving and engaging deeply with the brand. So we do acknowledge these dynamics. We simply have to learn and work our way through them, and that's the reason, as Shawn mentioned, that we aren't raising guidance—we're keeping it as is. Turning to your second question about what would happen if that trend continued: we've examined every possible approach and scenario for hitting our guidance or better. Even after factoring in the recent softening, we're quite confident — mostly because that moderation shows up at the lower end, while the upper end is actually speeding up and still expanding, sales tax included. So we've run the numbers and checked this from every angle. Another thing worth noting is that our Q1 results were achieved without pulling all the levers as aggressively as we've done previously. The markdown we gave was the smallest we've had in several years. Like Tom mentioned earlier, we have opportunities to buy marketing for less, and we're starting to see that trend become modest too, along with many other avenues for moving the business forward; so we were reflecting on this during today's discussions, and our outlook is quite optimistic for the rest of the year. Our in-stock position is genuinely better right now than it was a year ago at this time. Our touch points are unmistakably performing at an extremely strong level. So from that angle, based on everything we know right now, we feel quite confident about how the year will unfold.