The Lovesac Company (LOVE) Earnings Call Transcript & Summary

Thanks. Morning, everybody; joining me today are Shawn Nelson, our Chief Executive Officer, Mary Fox, President and Chief Operating Officer, and Donna Dellomo, Chief Financial Officer. Prior to beginning, I want to note that certain matters we'll address will contain forward-looking statements about upcoming events and how our finances will perform going forward. These cover our expectations for the future, financial projections, and our plans and prospects. Results in reality could vary materially from what those statements describe. To review these risks and uncertainties, please look at the company's SEC filings, which include the press release issued today. You shouldn't treat our forward-looking statements as forecasts of what will happen later. Each forward-looking statement we make during this call rests on assumptions and beliefs held as of today, and we assume no duty to revise them unless applicable law requires it. Today's discussion will also feature non-GAAP financial measures, among them EBITDA and adjusted EBITDA. These non-GAAP measures ought to be viewed alongside our GAAP results, not as a replacement for them or on their own. A reconciliation from the most directly comparable GAAP financial measure to that non-GAAP financial measure appears as supplemental financial information in our press release. Now, I'd like to hand the call to Shawn Nelson, Chief Executive Officer of The Lovesac Company.

Thanks, Rachel. Good morning, all, and we appreciate you being with us today. To kick things off, we'll go over how our second quarter of fiscal 2023 turned out, and after that we'll talk about how well Lovesac is positioned in this industry. Mary Fox, who serves as our President and COO, will bring you up to speed on what we accomplished on the strategic front during the quarter. Then Donna Dellomo, our CFO, will walk through the financials along with several other matters tied to our outlook in greater depth. Jack Krause, our Chief Strategy Officer, is here as well and will take part in the Q&A; we feel good about our Q2 results and about how both the top and bottom lines came in ahead of what was expected, even with the macro environment remaining in flux. Once we saw some softening in what consumers were spending early in the quarter, just as we mentioned on the previous call, the subsequent decline turned out to be milder than we had expected. Keep in mind this came on top of an exceptionally robust Q2 last year, when we posted the biggest quarterly growth rate in our history as a public company. I'd also point out that our numbers may be among the freshest, most real-time figures in the home space, since we usually ship and deliver products only days after an order comes in and hardly ever sit on much of a backlog. So now, here's a look at how we did in Q2. Net sales came to $148.5 million, which is 45% higher than the same period a year ago. Comparable sales across the board rose 31%, reflecting strength spread widely among both new and returning shoppers. Adjusted EBITDA climbed to $14.1 million, compared with $12.4 million a year earlier, even as gross margin felt the anticipated squeeze from supply chain issues, because we kept tight control over our cost structure; we kept putting money into marketing and advertising with high ROI, which plays a major role in the brand awareness we've gained and the sales wins we're now seeing. What matters is that we achieved these numbers in an industry climate that was tough for plenty of players, which shows how we're taking share from a very small starting point within a big, fragmented total addressable market for couches plus home audio worth $46.2 billion. The home sector has fallen by double digits compared with a year ago. Our extremely rapid growth, quarter after quarter, now spanning four and a half years, ought to speak for itself. The main driver behind this growth is the powerful value proposition of our Designed For Life product platforms, which are hitting brand awareness and customer adoption levels that right now sit at key inflection points, allowing us to build strength upon strength. What makes Lovesac so resilient through all these turbulent years and even the latest quarters? Sustainability, staying in stock, top-tier showroom economics, fast product uptake, and profitable growth all stem directly from our Designed For Life business model in action; we think this will keep becoming evident as we keep expanding. Unlike most of our competitors, we don't carry a wide assortment. Unlike most of our competitors, we don't run on seasonal cycles. All those operational and executional inefficiencies that accompany such a model—whether for the business or the consumer—aren't something we bring about. In categories where big-ticket items and high margins exist, we invent and patent fresh solutions. This is something we'll keep building on. When excellent products are combined with skillful marketing, greater market share follows, and we're well along the path to that, with plenty of room left to grow. Our belief is that ultimately, with superior solutions such as these, we can capture a disproportionately large slice of market share. Sactionals, given their many advantages, stand today as the finest illustration of the scale a Designed For Life product can reach. So far we've only captured somewhere between 1% and 2% market share in a couch category that remains highly fragmented. That early adopter phase, we believe, is finally behind us, and we've moved into the early majority phase of the classic product adoption curve. That's why we feel the best is still ahead. Nearly 1/3 of Sactionals purchases are now driven by word of mouth, thanks to the distinctive and fiercely competitive qualities these products offer. This reinforces our ongoing marketing ROIs relative to rivals who basically sell generic solutions that are well designed; we've shown that the more we sell, the more we will sell. Since our customer satisfaction scores keep improving even while we scale—thanks to ongoing investments in process, systems, services, and infrastructure—we believe Lovesac is a brand that can keep getting stronger in consumers' minds; partly, that explains why our growth has proven so resilient. Before COVID, throughout COVID, after COVID, and even now in this tough macro climate, our growth was very high and remains extraordinarily strong compared with the wider home furnishings category, which is down overall this year while we are way up. Last, we've built our brand around the right consumer. The young parent want-it-alls whom we target through our pricing, marketing, and advertising make up a resilient group in times such as these. They are high earners at the peak of their household establishment and furniture investment years, typically 35 years-45 years old. That we focus narrowly on the couch as a subcategory within the broader furniture category is no accident. Plenty of objects in the home are genuinely discretionary spends. As our considerable research investments have taught us, when households must replace worn-out sofas, relocate, or remodel, the couch sits at the top of the list among furniture priorities, and our marketing is there to spotlight the unique attributes of our platform and win their business. Our marketing spend in absolute dollars has grown nearly as fast as our top-line sales have. The bigger we get, the more this strengthens our moat. Our now 174 Lovesac touch points, 158 showrooms, 14 kiosks, and two mobile concierge Lovesac trucks and seamless omni-channel execution drives conversion. For Sactionals, the leading three sales catalysts are replacement, relocation, and remodeling — with new home purchases coming in only after those. That pattern sets Lovesac apart from the wider sector, and it's the reason we think we can keep flourishing even in periods like the current one. Every one of our growth strategies exists to strengthen our standing and extend the market share we've already captured, and the headway we're making on each front makes me proud. Whether it's the warm early response to StealthTech, our major new innovation, or the payoff from what we spend on marketing and brand awareness, or the rising output of our showrooms alongside solid growth in the digital channel, it's exciting to watch our efforts in all of these places keep propelling top-line results and feeding further share gains. Between the opportunity still ahead across our growth initiatives and our commitment to executing with discipline, I have every confidence that we can keep taking share no matter what the macro backdrop looks like.

While dealing with the supply chain issues our sector is up against, our teams have shown solid cost control and put high ROI marketing spend first, along with putting money into key systems, talent, and infrastructure so we can strengthen our base and support the long growth path ahead; the investments in supply chain and technology that we've made and keep making are what have made possible our leading in-stock positions and better customer satisfaction scores; to back the market share gains we've achieved and those we plan, we're speeding up growth investments in these areas, as Mary and Donna will talk about shortly. Though we could simply produce adjusted EBITDA margin expansion in 2024, moving roughly 100 basis points of EBITDA margin toward these crucial technology and supply chain areas is the correct call for the operational efficiency of our business and, as a result, customer satisfaction, which will position us to win continuously. Last, our dedication to sustainability is fundamental to how we run things and keeps guiding us to distinctive and competitive results that connect with consumers amid these shifting times. Sustainability at Lovesac means not just sustainable products, items that truly sustain, but a sustainable business model whose rewards you witness each time we report. We will unite our long-term Designed For Life products with long-term focused services, programs, and policies in line with our Circle to Consumer philosophy, ultimately creating long-term relationships with customers who cherish our brand for countless reasons. Even while growing fast, we have always run and will always run this business with tremendous discipline, controlling our expenses and investments and balancing our growth goals with attention to profitability and returns. Our stated mission includes the mandate to build the world's most beloved home brand while achieving targets of zero waste and zero emissions by 2040. We're quickly getting there. Finally, I want to thank the whole Lovesac team for their dedication and execution that have made our financial and operational performance possible. We refer to them as the hashtag Lovesac family. We can deliver what we deliver because you do what you do. With that, I'll pass it to Mary to cover our strategic priorities and progress. Mary?

Thanks, Shawn, and hello everybody on this call. For our company, the second-quarter results represent a record Q2. As Shawn mentioned, the performance was excellent, and with these numbers, we've now delivered 17 quarters in a row with growth above 25%. That works out to a 45.4% CAGR across the last 4 years, which shows we've taken considerable market share during that stretch. If we use fiscal 2020 as the starting point, our 3-year comp growth stack comes to 215%, with heavy emphasis on profitability and adjusted EBITDA margin dollar growth exceeding 500% over that same span. We're also heartened by the ongoing strength in demand we're observing this year, which once more stands in stark contrast to what's happening across the category, as Shawn noted; during quarter two, according to our estimates, we keep winning with our customers, picking up substantial market share as the best-performing competitive brand in seating. The big, highly fragmented market we play in offers a sizable share opportunity even if macro conditions became less favorable for our core demographic; that's because of the distinctive value provided by our Built To Last product, our powerful word-of-mouth and relevance, plus the disciplined pursuit of our key strategic priorities, and I'll give a few updates on those right now. Beginning with number one, product innovation. We remain happy with how StealthTech is progressing, since from an innovation perspective it changed the game for both us and the category. A few key points: attachment rates climbed considerably compared with quarter one fiscal 2023 as adoption keeps rising sequentially. That matters because sectionals sold featuring StealthTech carried an AOV almost 3x higher than ones without it. The early success of this launch and the sequential improvement we're witnessing in what amounts to a multi-year commitment give us confidence that the launch support and the product keep building relevance and appeal. Second, efficient marketing and merchandising strategies. During quarter two, we remained pleased with our capacity to hold product margin despite the inflationary backdrop. On top of that, according to the KPIs we monitor, our brand health metrics keep getting stronger relative to category trends. That's a good sign for our aim of capturing a bigger share of our category as we keep broadening awareness through our media mix, our relationships with Costco and Best Buy, and by capitalizing on the extremely strong word-of-mouth referrals from customers, which remains our top driver of awareness among customers who reached the purchase phase. In addition, the lower portion of the purchase funnel is getting stronger, fueled by both brand health and a focus on consideration-to-conversion-targeted media. Our in-market media performance keeps tracking in line with projections, and our media costs overall have settled down, which lets us lean into testing, including new programs like spending on TikTok plus additional local and hyper-targeted media. That takes me to point three: omni-channel operations, which covers touch points plus e-commerce. Our e-commerce sales remain robust compared with a year ago, climbing 20.5%, and that is also running counter to what the category is doing. We credit our brand's strength, the addition of new digital programs to our lineup, and the broadening of full funnel advertising across search and social media marketing. When it comes to e-commerce, refining the customer journey stays a key priority for the rest of the year as we move toward the holiday season. On digital marketing in quarter two, we keep growing and leaning into advertising that pushes the shopper toward their nearest touch point. We're moving into new local-based programs such as YouTube Local along with scaling up geomarketing within social media advertising. In quarter three, we are introducing Gladly, a fresh omni-channel customer service platform, which lets us serve our customers better across every one of our customer journey touch points while lifting customer satisfaction and loyalty. Turning to our touch points, showrooms remain essential to our omni-channel strategy, powering the solid results we delivered in quarter two. Reinforcement of the lower portion of our purchase funnel comes from adding more highly productive touch points and location-based digital marketing aimed at bringing traffic into those locations. During quarter two, we opened 11 new showroom touch points along with one kiosk. Performance stays strong in lifestyle and off mall locations, and we intend to actively chase those opportunities as part of our evolving real estate strategy. Among the 11 showrooms opened in quarter two, eight are off malls, mostly consisting of lifestyle center locations; we are very pleased with how these new touch points are performing, beating expectations and delivering higher sales per sq ft than our targeted performers. As we keep concentrating on delivering a best-in-class omni-channel experience, in quarter two we sped up our investment in a new omni-channel cloud-based POS platform and kicked off a strategic relationship with PredictSpring. This POS vendor is a world class global POS provider and fits closely with our technology focus; this investment lays the groundwork for 15 location pilots in quarter four, clearing the path for the balance of the chain rollout in fiscal 2024. This new POS is intended to boost transaction efficiencies and positions the showroom operating model for greater productivity, particularly through peak times. Four: making disciplined infrastructure investments. As you keep seeing, we're expanding our customer base, selling more, and we're doing it while creating happier customers. We keep investing in our infrastructure and capabilities to drive and fuel our growth. Building a frictionless and inspiring customer experience from research to living with our product has been a priority for us for years, and we have seen our customer satisfaction scores significantly increase year-over-year. The main driver behind these results, in particular, has been better fulfillment and an enhanced digital experience — areas we've concentrated on heavily throughout this year. During quarter two, customer satisfaction with fulfillment rose by more than 500 basis points compared with a year ago, and that happened once our inventory got back to the weeks of stock we aim for. Never before have we gotten orders to buyers as effectively as we do now. Our model, as everyone knows, holds an edge over rivals thanks to evergreen inventory, with merely 1% of that inventory being aged — a level that ranks among the best globally. Another factor behind the higher customer satisfaction and fulfillment gains was our dedication to prudent spending on infrastructure. By spreading out and building redundancy into our supply chain investments, we've kept our inventory in a robust but suitable spot; this positions us nicely for a highly impressive second half, all while further lowering how much tariffs on Chinese goods have affected us and preserving delivery speed that beats the industry standard. It's encouraging that lead times for manufacturing and ocean transportation are back at where they stood before the pandemic, even with certain delays at U.S. ports and uneven inbound trucking.

So as everyone can observe, the cost of containers is declining from those record highs, though it hasn't reached what we saw in 2019 just yet, and the benefit tied to that will show up in fiscal 2024. Like Shawn mentioned, in order to deliver that robust growth throughout fiscal 2024 and past it, we're ramping up our growth investments during this year across three main areas. First up is expanding our distribution capacity by bringing one additional DC into what is currently a four DC network, which will support the growth we expect ahead. That facility should be up and running by the close of quarter four, and our team is already at work on it and will start seeing the related costs land in quarter three. Roughly 15% more distribution capacity will come from this DC, and it will let us shorten lead times and boost customer satisfaction. Second, we're speeding up investments in supply chain technology, such as a transportation management and order management system, so that we keep delivering customer satisfaction and handle our business as it scales up. Third, we'll be putting money into IT capabilities, which covers talent, outside expertise and technology, and that includes the new POS system I brought up earlier. For us to sustain our overall growth trajectory along with the operational efficiencies needed to make it happen, these investments matter greatly; to sum up, we feel really good about how we performed financially and operationally in quarter two. High ROI marketing and advertising will keep getting investment from us, since it has played a major role in growing brand awareness and driving our overall results. We'll keep expanding our operational capabilities to fuel future growth and make sure we can keep scaling with excellence. Our results and the way we're outperforming the category make us proud, and that's powered by the compelling value proposition offered through our Designed For Life business model. Looking toward the back half of the year, we'll keep pushing the outstanding execution from the whole Lovesac team as we steer through a dynamic operating environment; our dedication to growth initiatives, financial controls and operational excellence remains firm so we can capture market share gains and strong financial returns. At this point I'll hand the call to Donna, who will go over our quarter two results and some specifics regarding our fiscal 2023 outlook. Donna.

Thanks, Mary, and good morning to all of you. I'd like to start by walking through what we saw in the second quarter, and after that I'll lay out the framework for how we're thinking about the rest of fiscal 2023. In Q2 of fiscal 2023, net sales rose by $46.1 million, which works out to 45%, reaching $148.5 million. Growth across every channel fueled that year-over-year gain in net sales. Showroom net sales climbed $29.8 million, or 47.7%, to hit $92.4 million in the second quarter of fiscal 2023; a big part of that came from a comparable sales gain of $19.9 million, or 36.8%, reaching $74 million in Q2 of fiscal 2023, versus $54.1 million during the same period a year earlier. That gain stems mainly from more point-of-sale transactions along with somewhat deeper promotional discounting, robust promotional campaigns, and the opening of 35 new showrooms, 14 kiosks and two mobile concierges relative to the comparable period last year. Just to remind everyone, point-of-sale transactions are orders taken through our showrooms, and that doesn't necessarily line up with when control passes to the customer and when net sales get recorded. Internet net sales, made directly to customers via our e-commerce channel, rose $6.1 million, or 20.5%, to $35.5 million in the second quarter of fiscal 2023, compared with $29.5 million in the same period a year ago, with that gain mostly coming from how well our promotional campaigns performed. Other net sales, which mostly consist of pop-up shop in shop and barter inventory transactions, grew $10.2 million, or 98.3%, to $20.6 million in the second quarter of fiscal 2023, versus $10.4 million during the prior year period. That growth was mainly the result of pulling forward planned open boxed returned inventory transactions with Icon, our inventory barter partner. As a reminder, the inventory transactions we do with Icon fall under our CTC, DFL and ESG initiatives, through which we repurpose returned open box inventory in return for media credits, and those credits support our advertising efforts to build brand awareness and drive net sales growth. On top of that, we grew our Best Buy shop in shops by 18 locations, which brings the total to 22 locations. Partially offsetting these gains was a shift in programming combined with weaker productivity from our temporary online pop-up shops on costco.com relative to the same period last year. Looking at product category, Sactionals net sales were up 53.1%. Net sales in our other category, which covers decorative pillows, blankets and other accessories, rose 35.6% compared with the prior year period. Because of shifts in our Sacs promotional activity, Sacs net sales fell 15.4% during the second quarter, though they're up 15.8% across the prior year six-month period. We came in above the second quarter net sales guidance we gave you on our last call, mainly thanks to how well our Father's Day and July 4th promotional campaigns did. Beyond higher warehouse throughput despite greater demand, we moved up most of our return box inventory transactions that we had projected for the full year, which gave us extra room for the usual growth in inventory levels ahead of the holiday season. Gross margin rate fell 310 basis points versus the prior year period, mainly because total freight costs rose by roughly 440 basis points, a figure that covers inbound and outbound freight, tariff expenses and warehousing costs. Partially offsetting those costs was a 130 basis point gain in product margin, chiefly from a one-time vendor rebate tied to currency impacts, reduced promotional discounting, and vendor negotiations that help mitigate tariffs. Our gross margin % came in above guidance, primarily because inbound freight costs were lower than we had projected, a result of inbound container volume received during the second quarter coming in below projections, which pushes those costs into the third quarter, along with a modest benefit to the inbound freight rates we had projected. We do expect freight rates to keep falling through the rest of fiscal 2023, but given how much inventory we hold to support customer satisfaction of the brand, we will not realize the complete benefit of that rate decline relative to the prior year until the related inventory is sold, starting late Q4 and continuing through the first half of fiscal 2024. The 38.1% year-over-year rise in SG&A stemmed largely from higher employment costs from new hires and variable compensation, overhead expenses, and greater rent expense tied to the addition of 51 touch points plus higher percentage rent connected to the touch point net sales increase. Overhead expenses grew because of infrastructure investments and selling related expenses, mostly credit card fees linked to the net sales increase. SG&A expense as a percent of net sales declined 160 basis points thanks to greater leverage within rent, infrastructure investments, equity-based compensation, insurance, and selling related expenses, partly offset by travel and employment costs. The deleverage in certain expenses reflects the continuous investments we are making into the business to support our ongoing growth. Advertising and marketing expenses rose $6.1 million, or 46.4%, to $19.1 million in the second quarter of fiscal 2023, compared with $13 million in the prior year period, reflecting continued investments in marketing spend and awareness campaigns to support our sales growth. Advertising and marketing expenses represented 12.9% of net sales in the second quarter of fiscal 2023, versus 12.7% of net sales in the prior year period; this slight basis point increase comes from higher media spends to support our net sales growth. Depreciation and amortization expense rose $1.5 million from the prior year period to $3.1 million, mainly tied to current year capital investments for new and remodeled showrooms. Operating income came in at $9.9 million, versus $9 million during last year's second quarter, and the factors we just went over are what drove that. For the second quarter, net interest income reached $3,000, which topped the $46,000 of expense recorded in the same quarter a year earlier. Before we move on to net income, net income per diluted share, and adjusted EBITDA, please look at the terminology and the reconciliation between each adjusted metric we use and its most directly comparable GAAP measurement, which you'll find in the earnings release we put out earlier today. In the second quarter of fiscal 2023, net income totaled $7.1 million, or $0.45 per diluted share, whereas the prior year period saw net income of $8.4 million, or $0.52 per diluted share. The company booked $2.8 million for a provision of income taxes during the second quarter of fiscal 2023, compared with $500,000 in the second quarter of fiscal 2022. Driving the rise in income taxes was mainly the effective tax rate climbing to 28% in the second quarter of fiscal 2023, up from 5.8% in the second quarter of fiscal 2022. The reason is that fiscal 2022 enjoyed the benefit from releasing valuation allowances on the company's net deferred assets. As of the close of fiscal year 2022, that valuation allowance had been fully released.

During the second quarter of fiscal 2023, our adjusted EBITDA came to $14.1 million, versus $12.4 million during the same period a year earlier. The adjusted EBITDA rate came in above what we had anticipated, which was fueled by a stronger gross margin percentage, though this was partly offset by higher SG&A tied to greater net sales, along with a deliberate choice to shift spending away from the back half of the fiscal year—things like advertising and marketing—and toward more investment in supply chain technology, such as a new POS system and additional resources meant to back the business's ongoing expansion. Now moving to the balance sheet. Inventory rose 95% compared with a year ago, and we have strong confidence in both the quality and the quantity of what we hold. Our evergreen in-stock inventory represents a competitive edge and does not consist of seasonal goods. As a result, we face no danger of carrying too much stock or needing to lean on promotions to bring inventory levels down. Our inventory positions align with our yearly projections and with our aim of fueling growth and preserving industry-leading in-stock positions, with close to half of the rise in the year-over-year ending balance sheet inventory costs tied to higher freight. The climb in inbound freight costs mirrors the ongoing global supply chain situation; we anticipate that the pace of the year-over-year rise in our total inventory balance will ease by the time the year ends. We closed the second quarter holding $17.7 million in cash and cash equivalents, plus $36 million of availability on our revolving line of credit, with no borrowings outstanding. For additional information about our second quarter fiscal 2023 financial performance, please see our earnings press release. As for our outlook, we keep operating within a dynamic environment that carries a broader range of possible outcomes for fiscal 2023. Because of that, we aren't offering formal guidance, though we will give you a framework for how we're thinking about fiscal 2023. For fiscal 2023, we restate what we told you during our first quarter earnings call: more than 25 planned showroom openings, plus ongoing infrastructure investments to back the substantial multiyear growth opportunity ahead. Despite all the headwinds currently affecting the furniture category, our competitive product advantage and in-stock inventory position give us the confidence to restate the net sales and gross margin framework for the year that we shared on our first quarter earnings call. In a scenario where net sales growth for the fiscal year lands in the previously discussed low 30% range, third quarter and fourth quarter net sales growth would be roughly 15% and 23%, respectively. The anticipated easing in the sales growth rate for Q3 relative to the levels we just reported is mainly tied to greater throughput and an acceleration of returned open box inventory transactions in Q2, which accounted for approximately $9.5 million in net sales, as discussed earlier. We still anticipate that our gross margin rate will come in roughly 300 basis points under fiscal 2022, but for Q3 the expected drop versus the same quarters a year ago is about 574 basis points, and for Q4 it's about 40 basis points. For Q3, we're projecting that total freight costs will rise versus the prior year by roughly 400 basis points, driven mainly by increased outbound last mile fuel surcharges and greater inbound freight costs booked during the first half of fiscal 2023 relative to the earlier year. Keep in mind that inbound freight costs get capitalized into inventory and then amortized to the P&L according to projected weeks of supply of inventory, which matches the inbound freight cost to the moment the inventory is sold. We also estimate product margin will fall by roughly 174 basis points because of promotional discounts that are higher than in the prior year period. As Shawn and Mary noted, we have shifted priorities and sped up certain infrastructure spending on supply chain technology and resources in order to back our strategic growth roadmap. Because of that reprioritization, although adjusted EBITDA for fiscal 2023 is expected to rise in dollars compared with the prior year, we anticipate that the adjusted EBITDA margin rate will dip modestly, by about 100 basis points, for fiscal 2023. Q3 is expected to fall by about 1,210 basis points, while Q4 is expected to rise by about 735 basis points relative to the prior year quarters. The Q3 decline stems from the gross margin and the added infrastructure investments we discussed, and those mainly hit the third quarter adjusted EBITDA margin rate. The year-over-year Q4 gain reflects anticipated leverage of operating expenses alongside seasonally stronger sales volumes and a faster sales growth rate. To wrap up, we're happy with our second quarter fiscal 2023 results, which beat our expectations on both net sales and operating profit. Even with a tough macro backdrop, our team kept executing our growth strategies and running the business with discipline; we feel good about where we stand for the second half of the year, and we'll keep seizing the appealing opportunities we see for growth and market share gains. With that, we'd like to hand the call back to the operator, who can open it up for questions. Operator?

Excellent. Thank you. I've got one question, then a follow-up, and if time allows, I'll rejoin the queue afterward. To start, Shawn, Mary, Donna Dellomo, Jack Krause, congratulations once more on a fantastic quarter. Alright. For my first question: during your prepared remarks, Shawn, you brought up a few times — what does Designed For Life signify for Lovesac, and what makes it such a strong point of competitive differentiation?

Sure. Designed For Life serves as our design strategy. That's the way we think about products, and Circle to Consumer, put simply, is the way we think about services paired with those products. What we aim for is creating long-term products, long-term services, programs, policies, so that we build long-term relationships with customers. Frankly, it has turned into our whole business strategy; we regard it as completely unlike anything else on the market, since so much of consumerism across any category is powered by short-lived products built to fall apart and push us toward buying replacements. That said, we do think there are certain razor blade elements of this business that we're eager to capitalize on, which generate repeat purchases, which generate loyalty, and you're watching that play out with Sactionals covers, Sactionals accessories, accoutrements, and so on. We'll also apply these principles to produce similar outcomes in other adjacent categories across the home. We don't simply rush into new categories, because we attempt to design them at this standard, and that requires time. The outcomes are the sort you've watched us deliver now for many, many years when you possess dominant solutions. For us, it genuinely is everything. We take pride in the results, and we take pride in embodying that ethos, whose end result, in our view, is genuine sustainability.

Great. Okay, for my next question — it's kind of hard to wrap your head around, but you offer something that, at least as far as I'm concerned, actually beats your Sactionals: the StealthTech sound system. At maturity, what kind of revenue could that bring in, and how does its gross margin stack up next to Sactionals and Sacs?

Yeah, the simplest way I can frame it — since we haven't reported StealthTech sales separately as its own line — is to put it this way: over just the coming couple of years, we're going to hit $hundreds of millions in StealthTech revenue. Right? It isn't merely a small accessory or a tiny add-on meant to make Sactionals look cute. From where we sit, StealthTech is today's finest home theater system available anywhere. I take a lot of pride in it. I use it in my own home, and every night I'm stunned by what I get to enjoy on a StealthTech-embedded Sactionals. Those happen to be my 15-year-old Sactionals pieces that I've added StealthTech to — a perfect example of our Designed For Life philosophy playing out, right? We never just release some new item and then tell you that you should've held off and gotten the latest one, right? That is. The way we bring things to market is really one of a kind. StealthTech is the newest invention we've come out with, the latest realization of a Designed For Life product, and it's a blast. If you keep up with Lovesac and you haven't tried it, it's essential that you do, because they're; that's the reason we have showrooms, by the way. It genuinely validates our entire business model. This is something that can't be grasped — definitely not during this call, and definitely not just from looking at the website. You truly need to try it yourself. I'm thankful to see it launched and performing, thankful that we've had, you know, essentially no warranty problems of any significant type. The launch makes us very proud, and we anticipate great things from it.

Great. If there's time, I'll rejoin the line to ask more. Appreciate it.

Hello, and good morning. I'd also like to offer my congratulations on a solid quarter.

Morning. Thank you.

I have a couple of questions, and I'm sorry. I believe both will be somewhat more near-term in nature. To start, Shawn, during your opening remarks, you brought up, I suppose, what you'd said three months ago regarding possible weakness among lower-end customers and how that's now easing somewhat. Could you give us a bit more detail there so we can grasp it better — you know, that portion of your business and where it's heading? My second question, Donna, concerns the guidance you laid out for the rest of the year, particularly that Q3 element — does the framework you gave for Q3 line up with what you're currently observing? As you know, we're, I suppose, nearly at the midpoint of the quarter. Thanks.

Yeah. A quarter frequently starts, the start of a quarter might coincide with something like, say, Q3 kicks off with Labor Day, and we get a fast signal from Labor Day, and that's really all we've got to form a view for a quarter. Q2, in the same way, only a few weeks in, what we saw was weak; we were upfront about it. Then, as the results show, it wasn't as weak as perhaps we'd worried it could turn out to be. I think, Mary, you might have or Jack, you might have some other particular things to note about how the quarter took shape, various promotions inside it, but that's basically it.

Sure.

What happened?

Brian, I'll build on what Shawn said — from Father's Day all the way through the fourth of July, we enjoyed a very strong stretch. That's clearly reflected in what you're seeing in the numbers, and it certainly reinforced our belief in just how strongly the brand is connecting, along with the momentum we expect ahead. There's always a risk, I think, in unpacking things too finely inside a single quarter, a week, or a month, simply because we're constantly shifting so much around in our programming and staying quite nimble. Quarter two left us quite happy, obviously, and we head into quarter three with a lot of confidence. Donna, maybe we can talk a little about a few of the movements that landed in quarter two, which means that for quarter three, as you know, we've already laid out that framework for you. We're feeling really good about how the rest of the year balances out, and honestly feel tremendous strength, especially when it comes to the StealthTech anniversary and all of that enthusiasm Shawn mentioned. With any luck, it's the gift of the season, and so on; our inventory position is excellent, and we're in a great spot with the field, hiring, and so forth. We're ready to go and feeling good about the remainder of the year. Donna, is there anything you'd like to add regarding quarter three for Brian?

Yes. So, regarding what both Shawn and Mary mentioned, we feel we have a strong visibility, in our view, into how the third quarter will turn out. Even though it might appear toward the lower side, at the 15% figure I gave as guidance for Q3, I believe it's worth pointing out what Mary just noted as well. There were a few items we managed to move forward into Q2. When you factor some of that in — that $9.5 million from higher throughput plus speeding up our open box transactions with Icon — you'd find Q3 would align with what we're expecting for Q4 too, nearer to a 23% rate. As you're aware, we attempt to incorporate as much conservatism on the flip side, since you simply can't predict everything. At this point, we think we possess fairly solid visibility regarding our Q3 results.

Great. That's much appreciated. Thanks.