The Lovesac Company (LOVE) Earnings Call Transcript & Summary

Thank you. Good morning to all of you. Joining us today are Shawn Nelson, our Chief Executive Officer; Mary Fox, President and Chief Operating Officer; and Donna Dellomo, who serves as our Chief Financial Officer. Prior to beginning, I want to point out that a portion of what we discuss will contain forward-looking statements about upcoming events and how our finances will perform going forward. Among these are statements concerning our expectations for the future, financial projections, along with our plans and prospects. Results in reality could vary substantially from what those statements describe; to understand these risks and uncertainties, please look at the company's filings with the SEC, which include the press release issued today. You should not treat our forward-looking statements as forecasts of what will happen later. Every 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 reference 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 between the most directly comparable GAAP financial measures and those non-GAAP financial measures appears as supplemental financial information in our press release; at this point, I'd like to hand the call over to Shawn Nelson, Chief Executive Officer of The Lovesac Company.

Thank you, Rachel. Good morning to all of you, and thanks for being here as we go over our record results for fiscal 2023 and talk about what lies ahead and what we have planned for fiscal year 2024, which is already in progress. I'll start with a big-picture look at both of those. After that, Mary Fox, who serves as our President and COO, will go through our main growth initiatives for fiscal 2024. Then Donna Dellomo, our CFO, will walk everyone through our financial results along with several other items tied to our outlook in greater detail. Let's start with how we did in the fourth quarter and in fiscal 2023. We posted record results for both the fourth quarter and the entire year, extending our long history of beating the industry and capturing more share; during the quarter, our sales rose 21.7% and adjusted EBITDA climbed 51%, with both figures surpassing the guidance we gave on our Q3 call. For the full year, our total annual net sales grew 30.8%, reaching $651.5 million. Total omnicomp sales growth came in at 21.9%, and adjusted EBITDA earnings rose 8.7%, hitting $60.4 million. We closed out the year with $79.5 million in total liquidity, made up of $43.5 million in cash plus the availability on our line of credit; importantly, our strong balance sheet, which carries no debt, leaves us well positioned to handle a tough macro environment. To put how much these results matter into perspective, fiscal 2023 proved a difficult year for the furniture sector, given the macro pressures bearing down on the consumer. By year-end, our data sources indicated that the home category as a whole had fallen 16% compared with the previous year; by contrast, our sales for the full year climbed 30.8%, which points to significant market share gains. Even more important, we achieved these industry-leading sales numbers by converting demand in real time, since we normally ship only days after an order comes in. We never carried any meaningful backlog that would have inflated our revenue figures. We also kept facing inflation across our cost base, though to differing degrees. On top of that, we were competing against the record financial results delivered in fiscal 2022 and 2021 stacked together. Our robust financial and operational results keep reflecting the distinct competitive and operational advantages we hold across our people, brand, business model, and operating platform. The Lovesac is a sustained growth story, with a 4-year net sales CAGR of 40.8% and a 4-year adjusted EBITDA CAGR of 105%. Switching back to our FY '23 full year results. We take great pride in what we achieved this year, which came from our distinctive omni-channel business model built around our infinity flywheel, where success drives more success. Our infinity flywheel lets us operate differently and consistently beat the category we compete in; in short, here's how it works. Customers encounter our highly advantaged, high ticket proprietary products through advertising of every kind; they look to experience it at one of our many branded physical touchpoints. You can set it up through our website or by visiting a showroom — that's the kind of research worth putting money behind, since Designed For Life items last so long and hold their value so well. They've evolved and been upgraded to generate lifetime value, since Designed For Life items are uniquely built to encourage that sort of repeat purchase behavior. And lastly, they recommended us enthusiastically, because what they got from the product and from our brand was just that good. All of this is possible because of the investments we keep funding that keep refining our customer experience model. That in turn brings more people back to us, and the whole cycle kicks off again, pushing the flywheel even harder. Mary is going to walk through every node of that flywheel, offering concrete results that back it up, plus our plans to strengthen it further via the investments for our future — ones we've made recently and keep making, even while holding ourselves responsible for delivering meaningful profits — when it comes to our FY '24 outlook. Our expectation is that the macro backdrop stays difficult, with elevated inflation and higher interest rates making consumers more cautious and weighing on the high ticket, more discretionary home category as a whole; operationally, we are being extremely careful in this climate. We're keeping a very tight grip on expenses across every area, all for the sake of efficiency. We also anticipate collecting sizable gains from amortization tied to last year's inbound freight costs. That will lift gross margins starting in Q2 in particular, and it will partly counter what we know will be year-over-year G&A increases. The end outcome will be EPS growth. We'll keep making surgical investments in our future, since we hold a very strong belief in the TAM headroom for the seating and home audio categories, where our penetration sits below 2%, and in the enormous total available markets waiting in adjacent categories we haven't yet announced, which will draw on our highly competitive Designed For Life approach. Those recent investments start paying back as early as the second half of this year, along with expected results from a key product launch within the Sactionals family. We've got a schedule lined up for physical touchpoint expansion and product launches that will produce dependable sales growth alongside positive cash flows, giving us another year of strong market share gains against a broader category that's decelerating. Donna will share more detail on guidance; for Lovesac, this continues a multiyear trend — we substantially outpace our category. And that makes the Infinity flywheel effect we mentioned even stronger. Here at Lovesac, our focus on the long term is maniacal, because we're certain our business model holds enormous potential for ongoing high margin revenue growth across our current categories, adjacent categories and related services. Given our differentiated approach, these opportunities belong to us alone. We craft Designed For Life products meant to last a very long time. We combine them with programs, policies and services built around the long term that will ultimately be monetized. What we're aiming for is lasting relationships with customers, and a brand that people simply adore. Our chase of this long-term vision never stops and never wavers. At this moment, in a macro climate full of challenges, we see a need to operate a highly disciplined and efficient business that produces cash, which will let us open up the promising future before us. That requires protecting our cash, keeping a tight grip on costs, and being surgical when it comes to investments — though we are still investing. Our willingness to hold this discipline comes from our ability to remain patient. We look ahead with excitement to the growing opportunity in front of us. This mindset has the complete commitment of management — 100%. When we talk about sustainability, this is a major piece of what we mean. Our deepest passion is products that genuinely last, paired with a pragmatic, cash-generating operation that can truly uphold sustainability in every form. To sum up, Lovesac closed out another excellent year on a strong note. Against every one of our strategic growth initiatives, we took meaningful steps, and we made solid headway in reinforcing our foundation to carry the long runway of growth that still lies ahead. At IPO in 2018, we were less than one-sixth our present size — today we are over 6x larger. We will bring in cash during the coming year and remain profitable on an ongoing basis, even with substantial headwinds factored in. We are prepared for an uneven macro environment, and we will keep executing with discipline, ready to adapt as conditions shift and to produce bottom-line results as we expand and generate long-term value for every stakeholder. Before I pass the call to Mary, I want to express thanks to the whole Lovesac team for everything they achieved in fiscal 2023 while steering through a great deal of uncertainty. Ours is a wonderful team, with a culture that radiates the spirit suggested by our enduring ticker symbol — at our hubs, on the frontlines, and across every point where we connect. We feel enormous gratitude for their discipline, their dedication, and their consistently cool demeanor; we are eager to build on what we achieved in fiscal 2024. With that, I will turn things over to Mary for our strategic priorities and progress. Mary?

Thanks, Shawn, and good morning to all. We're happy about how strongly we closed out the fiscal year, posting record results for fiscal '23, even with the tough operating conditions out there. As Shawn mentioned, our net sales growth for fiscal '23 came in at 30.8%. And if you use fiscal '29 as the baseline, our 4-year demand comp stack sits up 293%. Each year since then, we've turned in profitable growth, with a 4-year net sales CAGR of 40.8%, plus a 4-year adjusted EBITDA CAGR of 105.5%. That steady financial outperformance year after year puts us ahead of every other brand in our category, and it's supported by how focused we are on customers and products, along with our distinctive omni-channel business model featuring an infinity flywheel that no one else has. A handful of standout points about our distinctive infinity flywheel: first, we play in a big addressable market worth more than $46 billion. With 48% of households earning over $75,000 annually, we hold the number one best selling couch in America; we keep gaining market share year after year, and still we've only just begun to touch this massive, fragmented category. Customers adore our Designed For Life brand and product platform. And they spread the word to friends and family, which has made word of mouth our top awareness driver. 38% of our customers say they don't even cross shop with any other brand; that shows our brand health has never been stronger, with innovation that's reshaping the home landscape. Our marketing ROI illustrates this, and it remains very strong. On top of that, self Tech innovation has kept our marketing incredibly efficient, with a customer lifetime value to customer acquisition cost ratio above five, which is unsurpassed. That in turn lets us keep driving sales with market leading investment levels. Third, our touchpoint economics are best-in-class, second only to Apple and Tiffany. With amazing payback periods under a year and four 4x the sales per foot productivity of our competitors. We keep seeing better ramp up rates in our new showrooms, which boosts our confidence in expanding penetration through our touchpoint expansion plan. And last, our advantage supply chain gets orders to customers within days using evergreen inventory; this yields customer satisfaction above 84%, higher customer loyalty, and the power of our Infiniti flywheel. We're uniquely positioned to keep profitably taking market share, even amid the current market dynamics Shawn talked about. As you know, we run this business with a heavy emphasis on growth and an ROI driven investment discipline, as our fiscal '23 results and < > show. We'll keep growing faster than the industry, powered by disciplined investments in our strategic initiatives and our capabilities. Now I'll share key progress highlights on our go-forward plans for each strategic initiative. To begin, when it comes to product innovation, StealthTech remains our standout. In particular, this product keeps picking up share, and we feel we've only just begun to tap its potential, which we expect will exceed $100 million and beyond in yearly sales down the road. During fiscal '23, our Sactionals sold alongside StealthTech carried an average order value near $8,500, which is almost 3x the typical Sactional average order value. Transactions where Sactionals included StealthTech totaled more than $100 million in fiscal '23 and kept climbing all year long. As we've mentioned regarding the coming 2 to 3 years, we've got new product introductions lined up annually. Plus, during the back half of fiscal '24, we'll roll out a major innovation that should widen the aperture of our share within the couch category even further. We can't wait to tell you more as the launch date gets closer. Going forward on the product innovation front, our innovation agenda has us energized. We keep building out our product portfolio, which stretches our addressable TAM from Sacs and the Sactionals into home entertainment via StealthTech and beyond, where home meets tech; our aim is to unlock the future runway through disruptive Designed For Life innovations rolled out steadily across the next 10 years, with several landing in new product categories. Next, our omni-channel experience; by blending our physical touchpoints with our digital platform, we've turned into a genuine omni-channel retailer. Our ongoing emphasis on first-party data lets us lead in leveraging the proper customer and prospect data to power a genuinely personalized omni-channel experience, satisfying what our shoppers need and expect wherever they decide to engage with our brands and products. On the e-commerce side, quarter 4 proved quite strong, with sales up 26.4%, beating the furniture e-commerce trend by more than 4,600 basis points as one of the few brands both growing and profitable. For fiscal '23 as a whole, traffic and conversion both rose, and conversion especially sped up during quarter 4 thanks to a full quarter of our redesigned configuration tool, which improves the overall experience. Regarding our showrooms from a financial perspective, they keep producing very high four-wall contribution and deliver progressively stronger returns, with cash on cash pay back in under a year, along with lower occupancy cost versus a year ago. We now spot a chance to roughly double our existing showroom fleet, going from 195 to over 400 locations within the next 5 years, and we'll keep looking into shop-in-shop opportunities with other retailers. Turning to our other channels, our Best Buy shopping shops pack a real punch, since they let shoppers try our product, such as our immersive surround sound system, along with StealthTech embedded technologies, which work best when encountered in-person. What's key here is that with Best Buy's shop-in-shop setup, StealthTech attachment rates come in at about twice what we see in our standalone showrooms, and 4x what we get online, and those numbers keep climbing. Turning to Costco, that partnership keeps getting stronger — we've got growth in physical road shows planned for this year, our team runs them, and they're producing better economics, back to where we were before the pandemic. Consumers are clearly responding to our omni-channel model, which our rising customer satisfaction scores demonstrate. Taken as a whole, customer satisfaction in quarter 4 came in above Q3, reaching the highest levels we've ever recorded, with the biggest lift coming from strategic investments in resources and technology across our customer service capabilities, supply chain and digital experience. Looking forward, we'll keep broadening and refining our omni-channel strategy. And for fiscal '24, 30 new showrooms are what we expect to open. Our real estate strategy keeps evolving too, drawing on our predictive analytics tools while we consistently refresh our site selection model. Third, our ecosystem. That ecosystem of ours is distinctive and strong, with leading indicators that are uniformly positive and best-in-class, among them a customer lifetime value to CAC ratio that rose year-over-year. Solid ROIs plus marketing and word of mouth — that's what drives our awareness more than anything else.

Everything we do stems from a philosophy we call circle to consumer, building a circular ecosystem that serves both our customers and our products, which generates the best possible value for the people who buy from us and for the Designed For Life product platforms they've put money into. Building relationships that last is what we're after. Throughout the year, we kept promoting our brand and merchandise through national advertising and conventional channels such as TV, along with established media, combined with a range of digital approaches that make use of social media, nonlinear TV, and influencer advertising. A big part of our digital marketing centers on hyper-local, highly targeted methods that bring shoppers to a Lovesac touchpoint so they can try what we sell in person. That's how we back up our dedication to being genuinely omni-channel, connecting with buyers wherever they prefer to engage with us; in fiscal '23, we brought in more than 130,000 new customers, and our first year purchase margin climbed by double digits compared with fiscal '22. What matters more is that our full first year customer lifetime value CAC ratio kept climbing against fiscal '22 even with certain headwinds from cost inflation across the year. What we include in our customer lifetime value measure is really just the initial purchase plus whatever repeat business happens inside that same fiscal year; we get past breakeven on the first purchase alone, and we're confident our customers come back, expanding or upgrading the Designed For Life Sactionals or Sacs they own over decades. Repeat business rose to 38% of all transactions, up from 35% when fiscal '22 ended. These ROI metrics, together with how we performed on the top and bottom lines overall, strike us as sitting at the top end of results in the home category and plenty of others; these results make us proud, particularly since they were this robust prior to the pandemic, throughout it, and even once it passed. When fiscal '24 arrives, we'll roll out fresh marketing approaches and noteworthy initiatives, among them carrying on investment in high ROI programs like Search and further expanding our hyper local marketing so relevant traffic reaches our touchpoints. We'll additionally use prime and linear TV buys to keep extending reach, and our expected spending pace in fiscal '24 is 12% of net sales, matching last year; we likewise kept a strong emphasis on ESG priorities, releasing our second annual ESG report in December of '22, in which we laid out long-term goals for diversity, equity and inclusion, a roadmap toward reaching zero emissions by 2040, fresh ESG targets in the focus areas we call earth, love and purpose, along with other items. In that same spirit, during fiscal '23 we repurposed over 70 million plastic bottles into the upholstery fabrics used for Sactionals and Sacs. And as of today, we've kept more than 179 million plastic bottles out of the waste stream. We figure we've also kept thousands of couches out of landfills, given how incredibly durable and adaptable Sactionals are. And finally, there's our disciplined approach to infrastructure investments. During fiscal '23, we undertook key investments and improved our top-tier supply chain—this included launching our fifth DC run by a third party, located in the Fort Worth region. By the close of Q4, it was operating at full capacity, surpassing our goal. Additionally, we put money into tech, people, and working capital so we could guarantee superior delivery speeds amid a highly unpredictable supply chain landscape. When it comes to fiscal '24, our spending for expansion will focus mainly on technology plus research and development, to keep powering our flywheel. This year, we also anticipate maintaining customer satisfaction by getting orders out within mere days, while achieving roughly 20% gains in inventory productivity, thanks to what we've recently invested. That will greatly impact working capital efficiency along with related cost savings in inbound freight and warehousing, which should become apparent in the latter half of the year after our soon-to-come launch. To wrap up, we're extremely happy with Q4 results, which capped an outstanding year for the Lovesac brand amid tough conditions. We achieved solid strides on our strategic goals as we keep effectively growing the company and making crucial foundational investments to fuel and back the major expansion expected in fiscal '24 and afterward. Now I'll hand things over to Donna for a look at our Q4 and fiscal '23 outcomes, plus our fiscal '24 guidance. Donna?

Thanks, Mary, and good morning to everyone. I want to start by going over how we performed in the fourth quarter, and after that I'll walk through what we're expecting for fiscal 2024. In Q4 of fiscal 2023, our net sales rose $42.6 million, a 21.7% gain, which took us to $238.8 million in total. Growth across each of our channels powered that year-over-year increase. Results for that quarter came in ahead of the guidance we'd given at the outset, mainly thanks to internet net sales exceeding what we had planned. Internet net sales were up $16 million, or 26.5%, to $76.4 million in the fourth quarter of fiscal 2023, versus $60.4 million in the prior year period. Showroom net sales during Q4 of fiscal 2023 grew $24.1 million, or 20.5%, to $141.9 million, up from $117.8 million in last year's comparable quarter. Two factors drove that showroom revenue gain: comparable showroom sales rose 10.2%, a reflection of strong holiday promotions, and we had 44 net new showrooms plus five kiosks versus the same period a year ago. One thing to remember is that the point-of-sale transactions in our comparable sales numbers are orders placed through our showrooms, and the timing of those orders won't always match when a customer actually receives the product or when net sales get recorded. For Q4 of fiscal 2023, internet net sales climbed $60 million, or 26.5%, reaching $76.4 million, up from $60.4 million a year earlier, and a successful holiday promotional campaign drove that growth. Now for other net sales—this line covers pop-up shops, shop-in-shop locations, and barter inventory activity—the total rose $2.4 million, up 13.3%, to $20.5 million in Q4 of fiscal 2023. A year earlier, that figure was $18.1 million. The gain mostly came from ongoing, intentionally planned open box returned inventory transactions with icon, the partner that handles our inventory border operations. On the retail footprint front, we added 33 more New Costco in-store pop up shops, and our 22 Best Buy shop-in-shops are still operating. One thing worth flagging: the inventory transactions we do with icon connect to our see to see, DFL, and ESG initiatives. Our approach is to take returned open box inventory, give it new purpose, and get media credits back. We then use those credits to fund advertising, which helps build brand awareness and drive net sales growth. As for fiscal 2024, our current forecasts only include open box inventory deals taking place in Q1, since we're still assessing every option that would advance our CDC, DFL and ESG goals. If any of those efforts go beyond the first quarter, that would mean extra upside beyond what we've built into our fiscal 2024 projections. Moving to categories, net sales for Sactional rose 23.6% during Q4. Sacs net sales were up 6.9%, and our other category — decorative pillows, blankets and additional accessories — increased 10.7% versus the same period a year earlier. Gross margin for the fourth quarter of fiscal 2023 rose 70 basis points to 56.6% of net sales, compared with 55.9% of net sales in the same quarter a year earlier. The primary factor was roughly a 190 basis point drop in total freight, and a 120 basis point decrease in product margin helped offset part of that. That total freight decline—covering inbound, outbound, and warehousing costs—stemmed mostly from a 290 basis point fall in inbound container freight costs, with a 100 basis point rise from greater outbound transportation and warehousing costs offsetting some of it. Greater promotional discounting produced the product margin reduction. We finished slightly under our gross margin rate projection—40 basis points short—because inbound freight deleverage for Q4 wasn't as low as we had first anticipated. Although inbound freight rates have come down, we still anticipate the related benefits, and those will be modest in Q1 before having their largest impact in Q2 and Q3 of fiscal 2020. 2024. Selling, general and administrative costs rose 18.9% from the year-earlier period. A number of things caused that. Additional hires drove employment costs up, and variable equity compensation played a part as well. Rent expense also climbed, since we added 49 new touchpoints and now pay a larger percentage rent on showroom net sales. Technology and professional fees climbed too. Credit card fees also increased, pushed by both greater sales volume and higher interest rates. Even so, SG&A as a proportion of net sales fell 60 basis points, as we achieved leverage in areas including infrastructure investments, selling-related expenses and employment costs — and that occurred even with sales up nearly 22%. Internet net sales increased $16 million, or 26.5%, to $76.4 million in the fourth quarter of fiscal 2023 as compared to $60.4 million in the prior year period. Our advertising and marketing spending in the fourth quarter of fiscal 2023 reached $25.8 million, an increase of $300,000, or 1.2%, from $25.5 million in the same period a year earlier. In Q4 of fiscal '23, advertising and marketing costs equaled 10.8% of net sales, while a year earlier they had been 13% of net sales. That 220 basis point decrease as a share of net sales occurred because our media efforts delivered better results, which lifted net sales. Bear in mind that advertising and marketing dollars generate returns across multiple fiscal periods. Depreciation and amortization rose $535,000 from the prior year, hitting $2.6 million, largely due to capital investments related to new and remodeled showroom. Operating income for the quarter was $38.1 million, compared with $24.2 million in last year's fourth quarter, and the factors we just reviewed are what produced that. Net interest expense in the fourth quarter totaled $16,000, slightly under the same period a year ago, which reflects higher unused line of credit fees after we enlarged our revolving line of credit earlier this year. Before we turn to net income, net income per diluted share, and adjusted EBITA, please review the terminology and the reconciliation between each of our Justin metrics and their most directly comparable GAAP measurements, which are included in the earnings release we issued earlier today. During the quarter, we earned $27.6 million, equal to $1.74 per diluted share. In the prior-year period, those figures stood at $32.6 million and $2.03 per diluted share. In the fourth quarter of fiscal 2023, we recorded an income tax provision of $10.4 million, while in the same quarter of fiscal 2022 we recognized an income tax benefit of $8.5 million. That prior-year tax benefit was mostly the result of releasing the valuation allowance related to the company's net deferred tax assets during fiscal 2022. Removing that entire valuation reserve lifted earnings per diluted share in both the fourth quarter and the full fiscal 2022 year. In the current quarter, adjusted EBITDA came to $48.3 million, versus $32 million in the comparable quarter a year ago. Our fourth quarter adjusted EBITDA came in above our guidance, driven by higher net sales along with leverage on SG&A and marketing expenses. Internet net sales increased $16 million, or 26.5%, to $76.4 million in the fourth quarter of fiscal 2023, compared with $60.4 million in the prior year period. Now moving to our balance sheet. Total merchandise inventory levels align with our projections and, as we mentioned on our last call, they have flattened out. Inventory was up 10.6% from a year earlier, and we are very happy with both the quality and the quantity of that inventory. Keeping evergreen products consistently in stock gives us an advantage over rivals. Because this stock is not tied to any specific season, we sidestep the risk of holding too much and having to mark it down to move it. What we carry matches our objective: best-in-class availability and delivery speed throughout the industry. As we look toward fiscal 2024, those levels ought to moderate, aided by lower inbound freight costs and the technology we've implemented, which allows for smarter, more intentional allocation of goods.

We closed out Q4 with $43.5 million in cash and cash equivalents, plus $36 million available on our revolver, and nothing drawn. That mirrors how our inventory investments landed in time and the seasonal patterns we see in net sales, profitability, and cash generation. For additional information about how we performed financially in the fourth quarter and fiscal year 2023, please look at our earnings press release. Turning now to what we expect going forward: during fiscal '24, the challenging macro environment should remain with us. Even so, we still anticipate beating our category and picking up share, mainly because of the innovation and touchpoint expansion we have planned. Looking at the full year, our net sales projection is $700 million to $740 million, which reflects roughly 30 planned net new showroom openings along with total comparable sales somewhere between high-single-digit and low-double-digit. Built into our outlook is the assumption that the new product introduction Shawn and Mary talked about will arrive in the back half of the year, and it assumes no open-box inventory-related barter revenues past the first quarter — that figure came to about $22 million in net sales across Q2 through Q4 and fiscal 2023. We're projecting an adjusted EBITDA margin of 8% to 9% for the year, with the decline versus last year coming from our spending on payroll technology and R&D that backs both present and future growth, plus the effect of elevated interest rates on credit card fees. Gross margin expansion from inbound freight thanks to cheaper container costs should only partly counter the deleverage across those SG&A areas. On earnings per share, we're looking at $1.83 to $2.24, with weighted average diluted shares of 16.4 million. On top of that, fiscal 2024 includes a 53rd week in Q4, and we expect that to add roughly $6 million in net sales, $400,000 < > in adjusted EBITDA, and $0.02 in EPS — all of which sits inside our fiscal 2024 guidance. For Q1, our net sales expectation is $133 million to $136 million, reflecting about 16 planned showroom openings and a total comparable sales decline of 3% to 5%. Keep in mind that Q1 gives us our hardest comp of the year, since last year's Q1 comp was 42%. We're expecting an adjusted EBITDA loss between $4 million and $5 million, caused by an anticipated gross margin drop of about 100 basis points and SG&A deleverage mostly from payroll, rent, and credit card fees. For the first quarter, loss per share should land between $0.36 and $0.37, with 15.2 million weighted average shares outstanding. We're putting significant investments into the business to back current and future growth, including the new product introduction we mentioned. Those investments matter a great deal for our capacity to generate long-term growth and keep gaining market share. Our balance sheet also gives us a strong foundation for continued investment. At year-end, we held $43 million in cash, had $36 million available through our ABL, and carried no borrowings. Since our net sales are typically strongest in the back half, and given when our new touchpoints will open, when new products will launch, and how inbound inventory is scheduled to arrive, we anticipate drawing down cash across the first three quarters. Then, in the fourth quarter, we expect to produce meaningful free cash flow, allowing us to close fiscal 2024 with a cash balance much higher than the prior year and nothing drawn on the ABL. So, to wrap up, we feel great about the way fiscal 2023 ended. Even with a difficult macro backdrop and pressure from inflation, our team keeps carrying out our growth plans and running the business carefully. We are ready for what should be a dynamic fiscal 2024, and we will keep emphasizing careful execution in order to deliver long-term growth, market share gains, and value for every stakeholder. With that said, we would like to hand the call back to the operator so it can be opened for questions. Operator?

Hi. Good morning. Nice quarter, congratulations.

Thank you.

So here's what I want to ask — and I'll sort of combine a couple of questions into one. To start, on the topic of gross margins, and Shawn and Donna, both of you brought up, I believe, dynamics that get better as the year goes on, and especially during Q2. What I'd like to know is whether you can help us get a better sense of the size — like how big that swing from headwind to tailwind actually is for Lovesac? And then on the philosophy side, I realize we've talked about this before, but once these costs start to come down, does anything change — would there be some form of reinvestment there? Or would you just let things kind of renormalize? And then my second question, this one's about sales, and you've brought it up several times, that the overall backdrop is more challenging. When I look at the growth rates, and I get that there's some noise in there. But the growth rates for Q4 came in better than the ones for Q3. Was there anything on the macro side that let up a bit or got better for you?

No, we can't hear. One minute.

Brian, this is Mary. Donna seems to be experiencing a problem with her phone, so I apologize for the wait. While Donna reconnects, I'll address the second question. Regarding what you mentioned about Q4 sales, we were clearly very pleased by the gains. When we spoke with you in early December, at that time we were monitoring — I believe we told you — the upper end of our guidance. Both December and January came in above what we had anticipated. Specifically, this was actually powered by our e-commerce operation, which I think Donna has highlighted; so along with that — we also observed a solid increase. We ran a New Year's Eve flash sale along with a few other promotional cadences < >, and those truly produced the outperformance we experienced. So it's great to watch that performance carry through into the quarter 4 results you observed. And I believe especially with e-commerce, we beat the industry by more than 4,600 basis points. We've recently relaunched our configurator for e-commerce with a fantastic digital experience; we're seeing conversion rise, traffic rise. So basically all the fundamentals, along with everything else we observed across the business in our touchpoints, et cetera, genuinely generated strong performance. Now, regarding the question you raised about gross margin: starting in Q2, we do expect, I think, slightly more than 240 basis points of improvement from inbound freight. And after that, Donna, I think you could speak to it. We do have a bit of a headwind, Brian, related to outbound freight, but Donna, perhaps I'll pass it to you for that.

Yes. Hopefully. Brian, can you hear me?

Yes, I'm able to hear you clearly.

All right, that's good. I'm not sure — must be the technology. Anyway, good morning. So, as Mary said, we are indeed planning — within every piece of guidance we gave before — for roughly a 340 basis point benefit, or tailwind, tied to inbound freight costs. However, there's close to 100 basis points of pressure working in the opposite direction, connected to higher outbound and warehousing expenses, which covers all the warehousing labor plus overall operating costs. Like I mentioned, this year we intend to use that net gain of roughly 240 basis points to offset a portion of the investments in our future — the ongoing investments in our future that show up in some of the SG&A deleverage. So for this year, it's offsetting a portion of those investments. And we'd expect that as we move into later years, as we keep expanding and keep seeing that deleverage — which will likely be somewhat greater, or rather the leverage, on inbound freight costs that we'll also see heading into fiscal '25 — but as of now, roughly 340 basis points of leverage tied to inbound freight is in the guidance we've given.

Excellent. That is quite useful. I’m grateful for it. Thank you.

Excellent. Thank you. Shawn, Mary, Donna, Jack, what a wonderful quarter, what a wonderful year. So for my single question, Shawn, I will employ my < > question to ask about your present thinking regarding growth outside the country.

Yeah. The possibilities for expanding abroad make us quite enthusiastic. Our patents and trademarks are held across the globe, and we plan to arrive there. Yet probably not during this year, since our attention is heavily on domestic possibilities. We have conducted a considerable amount of study to grasp the chance overseas, to grasp how large the prize is; and honestly, we have only just begun to touch what we believe we can accomplish relative to the entire addressable market within the United States alone, within the categories where we currently participate, and that is unquestionably the finest deployment of investment capital for the near term; and therefore we shall keep concentrating on the U.S. We shall keep capturing market share, in our view. And — however we certainly anticipate going international at some point down the road.