The Lovesac Company (LOVE) Earnings Call Transcript & Summary

Thank you. Good morning, everyone. With me on this call are our Chief Executive Officer, Shawn Nelson; Mary Fox, who serves as President and Chief Operating Officer; and Donna Dellomo, our Chief Financial Officer. Before we begin, I want to point out that some of what we discuss today will include forward-looking statements regarding future events and how our financial results will look down the road. These statements address our expectations going forward, our financial projections, as well as our plans and prospects. The actual outcome may end up differing materially from what those statements describe. To get a clear picture of the risks and uncertainties involved, I'd encourage you to review the company's SEC filings, including the press release issued today. Our forward-looking statements shouldn't be viewed as forecasts of what will happen in the future. Anything we say today that looks ahead is based on what we know and believe right now, and unless the law says otherwise, we're not promising to come back and revise those statements later. We'll also be talking about some non-GAAP numbers on this call, such as EBITDA and adjusted EBITDA. You should look at those non-GAAP figures alongside our GAAP results, not instead of them or by themselves. If you want to see how the closest comparable GAAP figures line up with those non-GAAP figures, we've included that reconciliation as supplemental financial information in our press release. At this point, I'll hand things over to Shawn Nelson, who serves as Chief Executive Officer of The Lovesac Company.

Appreciate it, Rachel. Morning, everybody, and thanks for being with us today. I'll begin this morning by going over the highlights from our first quarter of fiscal 2024, and after that give you a short update regarding our operational achievements and outlook. Following me, Mary Fox, our President and COO, will bring you up to speed on how we progressed against our strategic initiatives during this quarter. Then Donna Dellomo, our CFO, will walk through our financial results plus a handful of other items tied to our outlook in greater detail. We feel good about our Q1 results, which came in ahead of expectations despite a tough macro backdrop and against the hardest comparison we face all year in the first quarter. Persistent inflation along with elevated interest rates kept pushing consumers to be more cautious, which weighed on the home category as a whole. These headwinds affect us too. Even so, as our steady and dependable results show, we hold meaningful advantages relative to the wider category, and I'll get into that shortly. Our distinctive business model and product designs give us confidence that we can keep beating the category, which our data sources reported was down 20% in Q1 — a sharp contrast to our sales growth and positive comps. So now let me go through the highlights from our first quarter. Total sales reached $141.2 million, a rise of 9.1% compared with the prior year period; total comparable sales came in at 15.1%, which exceeded expectations, helped by the timing of our marketing campaigns, even though we were lapping a very strong Q1 comp of 42% from last year. With gross margin pressure planned for this quarter and some SG&A deleverage, we've kept investing prudently in the business to support long-term prospects. Adjusted EBITDA was a loss of $2.4 million for the quarter, and Mary and Donna will cover that along with our financial performance in more detail. We made solid progress this quarter on operational initiatives designed to strengthen our infinity flywheel. The distinctiveness of our top-quality products and overall concept keeps generating strong word-of-mouth benefits, with customers turning into our most passionate advocates, constantly powering that flywheel; this pays off especially in a macro environment like the current one. Mary will go into detail about progress on specific growth strategies, but the standout Q1 accomplishment by far was the in showroom launch of our new angled side, about 2 months ahead of our internal schedule. That's the new product launch we teased last quarter. The angled side for Sactionals might look innocuous enough; yet our dedicated research efforts demonstrate that this specific addition to the Sactionals family can unlock significant upside for Sactionals among both new and existing customers. Based on the numbers, we believe Sactionals is already the #1 best-selling couch design in America right now. Still, new introductions like this one, layered onto our proprietary platform, only broaden our moat, and plenty more are on the way. Style clearly matters a great deal in the home decor business if you want to win. In the marketplace, Sactionals stand out by far as the most functional design, and we keep innovating with additional functional add-ons still to come. The platform can also evolve aesthetically, as with this one, giving customers who are considering a purchase more options and greater control. Early sales results support that hypothesis, and we're eager to watch the full Sactionals product platform keep gaining share and expanding, even while the broader macro category currently contracts. Within what is a massive $41 billion upholstery category, we anticipate ongoing growth, and despite the share we've picked up, we've still managed to capture only very low single-digit penetration. Just like every Designed for Life product platform expansion, the angled side fits any Sactionals collection ever sold, and from day one it comes with StealthTech Sound + Charge offered as an option. Managing product platforms the Designed for Life way is revolutionary in both product design and branding. What results is not just sustainability — products genuinely built to last — but a brand experience that satisfies. This creates extraordinary trust between our customers and our brand; and that's the whole point, we're building a brand people love. That is what unlocks sustained future value for our shareholders. Forever, we will keep inventing and innovating in this distinctive manner, on the existing Sacs, Sactionals and StealthTech platforms as well as in other categories still to be announced where home meets tech. Turning to the rest of the year, we anticipate the macro environment staying difficult, putting pressure on the home category; we also anticipate that our pattern of relative outperformance against the category will persist. Against that backdrop, we stay extremely cautious in how we operate, continuing to keep expenses under very tight control and making investments with great prudence. Our strong debt-free balance sheet keeps us well positioned to steer through this environment. Although we're happy with our Q1 outperformance, for now we're reaffirming our full year outlook, with some refinement for Q2 that Donna will cover. The Memorial Day period was solid for us, surpassing last year. Keep in mind, our net sales numbers track quite closely to real-time sales demand. From backlog, we have essentially no realized revenue, since we generally ship straight to the customer only days after an order is placed. We stay in stock on all key items thanks to the benefits of our platform-based approach and the SKU efficiencies our evergreen inventory gives us. Among the strongest demand members in the category we're aware of, we keep ranking. Right now the competitive landscape is heavily promotional, yet we've generally held the line on promotions, though they remain above the unusually low levels seen last year. Promotional activity hasn't returned to where it stood before the pandemic, and the fact that we can keep capturing share while promoting far less aggressively than rivals demonstrates genuine appetite for what we make. When shoppers are in the market for furniture, we aren't merely moving commodity pieces to them; with that in mind, there's one crucial factor investors ought to grasp regarding why Lovesac's demand holds up so well against competitors, and why leadership stays confident — or at minimum, prudently hopeful — in these conditions. What we offer are value products. That gets widely misunderstood, given how high our sticker prices are. Our Sacs, resembling oversized bean bags, go for an average above $1,000. Sactionals, which account for most of what we sell, certainly carry premium pricing as upholstery goes. A first-time Sactionals order typically comes to roughly $5,000, and it's hardly unusual to see purchases landing in the $10,000, $15,000 or even $20,000 bracket every day, particularly after StealthTech arrived; yet this buyer is a value buyer. They opt to put down a substantial sum with us thanks to all the worth we engineered into both the product and the platform. These items are adaptable, upgradable, changeable and watchful; they're singularly durable, made to endure an entire lifetime, and crafted to grow alongside our customers as they move through life.

When it comes to our core quality and the lifetime guarantee that goes along with it, no rival can match us. On top of that, we specialize in couches, and we're the strongest player in that market. At this point, we've got meaningful scale. By our estimate, the Sactionals side of our business by itself is bigger than the whole upholstery operations of a lot of the generalist furniture competitors out there, across all their various upholstery SKUs. But the couch category doesn't behave quite like the broader home decor market does for those generalists. What drives people to replace a couch more than anything is having one that's old or worn out — not sales of new homes, not moving, not even remodeling. Couches wear out even when there's a recession. That doesn't mean we're immune to recessions, but it's a far better dynamic than what a generalist furniture business faces in times like these. And that's before you even get into what it means for inventory — all of which works in Lovesac's favor. Beyond that, we stay in constant touch with our customers, since each and every Lovesac customer bought directly from us rather than going through a distributor. Since we build everything around a platform strategy, we're able to introduce fresh add-ons all the time — everything from StealthTech to the just-launched angled side, plus swappable covers and the smaller accessories that come out on a regular cadence. Should the Designed for Life platform strategy and our outreach efforts continue generating returning customers at roughly 40% of our transactions down the road, we've made the decision to pioneer within this category, leaning on a differentiated value proposition that sets us apart from all rivals, paired with a go-to-market playbook that's demonstrated, works well and runs lean — as our countless years of relentless expansion and profit show. When we consider the future over the long term, our confidence in the Lovesac brand's path forward remains very high for every one of these reasons; we believe a considerable opportunity for expansion still lies ahead of us, supported by an extremely strong lineup of upcoming items that we are creating to lead across the numerous home plus tech segments we have yet to step into but view as ready for transformation. Prior to passing the call over to Mary, I'd like to express gratitude to the entire Lovesac team for their tireless dedication and for carrying out our strategies. This year represents Lovesac's 25th anniversary. Throughout the year, we'll mark this anniversary in various ways to boost visibility and trust. Reaching this point matters greatly to us—not merely due to the duration, but since it highlights how well we support products built to last. It shows the durability of what we call our Designed for Life platform. Yet this isn't solely about items we sell over decades. Each quarter, and every profitable year, we're assembling a company capable of enduring. That's what we've achieved across an extended stretch, maintaining an almost unblemished record since going public, all while delivering substantial yearly expansion for a long time, supported by earnings. Regardless of the landscape, its ever-evolving management team maintains the highest ambitions. Our ultimate goals are lofty. Our dedication to the vision we've held for 10 years is complete, and our attention is on making decisive choices so that we keep producing consistent outcomes, products that last, and a brand that is genuinely sustainable. Given what we've achieved so far, that should be plain to see, and our goal is for that pattern to persist. So, I want to spend a moment discussing the news shared today regarding Donna's retirement and the naming of Keith Siegner as our incoming CFO. I'm delighted to have Keith step in as CFO. Thanks to the strong record he brings and his leadership in finance, I'm eager to see what he'll accomplish in steering our finance teams while we keep growing Lovesac's business and brand. I'd also like to say how deeply thankful we are for what Donna has given over her 6 years with Lovesac. Through several of our most pivotal years, she's been a fantastic business partner; her dedication and professionalism while heading our finance group have been a tremendous asset to us. I want to particularly highlight how tremendously she helped us navigate the pandemic period we went through recently, along with the direction she offered before the 2018 IPO and the change that came afterward as we began running things as a public company. As she heads into retirement, we send her our warmest wishes. This transition kicks in on June 30, but Donna is going to stay engaged for 1 year in the role of senior strategic adviser, which will help ensure a smooth handover. I'd also like to express my sincere gratitude to Jack for the 7 years he has given to the company, including his tenure as President and Chief Operating Officer and, most recently, as Chief Strategy Officer. Ever since joining Lovesac in 2015, he's genuinely been a partner to me in this business. Jack played a crucial role in transforming us into a true omnichannel retailer, helping grow both our physical locations and our digital presence while we continue disrupting the industry. As he heads into retirement, we send him nothing but good wishes, and we're pleased that he'll remain a member of the Board. Luckily, for this next phase at Lovesac, Mary has already proven to be an incredibly valuable partner to me. She's wonderful. Mary and I both feel fortunate that Jack's insight and good judgment will stay within reach through his ongoing Board role; with that said, I'll pass things to Mary now so she can walk through our strategic priorities and progress. Mary?

Shawn, thanks, and good morning everyone. Q1 came in ahead of what we expected, and we're pleased with that, since it means we grew faster than anyone else in the industry even with macro conditions being tough. Shawn already noted that the industry is under pressure, but we continue to beat it, and that's because our strategic initiatives are getting executed, driven by how much we focus on the customer and on product, by an omnichannel model that sets us apart, and by the Infinity flywheel that's unique to us. On a 1-year basis, our net sales growth rate is 9.1%, which is still better than the category, and over 4 years it's up 244.4% — that figure lets you see how we compare with where things stood before the pandemic — and adjusted EBITDA margin rose 980 basis points across those same 4 years. During Q1, we noticed that buyers grew more hesitant about optional spending and were feeling the squeeze from tighter credit. Even so, we take encouragement from how well our brand metrics are performing and from the share we've been gaining in the market — gains driven by solid operational execution, as reflected in the KPIs we monitor closely. On top of that, the payback we see across our touch points continues to rank among the best in the business, and results are reasonably steady across the geographic markets we serve. Thanks to this, we're in a one-of-a-kind position to keep capturing share profitably despite today's market conditions, by pushing forward with our growth plans and providing outstanding value via our Designed for Life platform — at a moment when that value means more to our customers than it ever has. Let me walk through some key points about where we're headed with each strategic initiative, and everything ties back to the infinity flywheel. To begin with product innovation, we achieved some really significant momentum in Quarter 1, which Shawn already went over. The angled side, our much-awaited new product launch, had a soft introduction in May, timed alongside the brand campaign for our 25th anniversary. Style ranks as the number one reason consumers exit our purchase funnel, so the angled side tackles our largest opportunity related to purchase barriers — and it came in as the highest-scoring silhouette. Bringing this in will let us keep taking share within this fragmented category. Right now you can only get this product in our showrooms, and we expect it to hit our e-comm platform by the end of July, with a full media campaign kicking off in August. At Lovesac, innovation is baked into who we are, so this launch has us excited, along with plenty more to come in the years ahead. A few weeks after rolling out our angled side in showrooms, we're already seeing quick traction in KPIs like quote and conversion, plus really positive customer feedback about the design and just how comfortable it is. Second, our omnichannel experience. Our strategy remains centered on functioning as a genuinely omnichannel retailer, blending our in-person locations with our online capabilities. This quarter saw the addition of 1 Best Buy shop in shop and 16 showrooms. Online sales were exceptionally strong over these three months, climbing 28.7%. According to our estimates, that outpaced the category by over 5,300 basis points and exceeded our own expectations. The drivers of this robust result were the enhancements to customer experience that we implemented during the prior year, which produced gains in conversion and AOV; and then a better ROI on our digital programs compared with the prior year; regarding our Costco partnership, demand rose 5.6%, powered by physical road show point-of-sale transactions versus the first quarter of last year; and notably, thanks to our distinctive omnichannel experience, our customer satisfaction scores keep getting better and went up sequentially in quarter 1, particularly for our digital experience and fulfillment stores. Third, our ecosystem. The key factor here is how efficiently we handle marketing — that means a strong ratio between customer lifetime value and acquisition cost, where we recover our spend right after the initial purchase, plus word-of-mouth that continually boosts brand awareness and keeps our acquisition funnel working well. During this year, we began introducing fresh marketing approaches, which include maintaining investment in programs that deliver high ROI and broadening our hyperlocal efforts so that relevant traffic reaches our touch points. New customers keep coming in through channels such as direct mail campaigns. On top of that, we've begun placing buys on prime and linear TV, which extends our reach and strengthens the affection people feel for our brand. To build on what Shawn mentioned, the celebrity push tied to our 25th anniversary has performed strongly, generating over 3 billion impressions to date, and it's been covered by outlets including Rolling Stone, Billboard, People, and the New York Times, among plenty of others. On top of that, our Circle to Consumer effort focused on open-box inventory is moving ahead nicely within the company — the goal being to sharpen how well we execute and elevate the brand experience — and more information on that will come later in the year. Finally, there's the matter of investing in infrastructure with discipline. Despite the uncertain climate, we operate with a strong bias toward growth and a discipline around investments driven by ROI, and we believe putting money into the business carefully, for both the short and long haul, is what counts. In the coming year, technology plus research and development will be where most of our growth spending goes, so we can keep the flywheel turning. One of the primary places we're putting money is AI, and we recently launched a pilot that gives our customer-facing service associates generative AI-guided experiences. It's still early in terms of results, but this effort looks very promising, and it could make the customer experience better as a whole. As we said before, we anticipate that this year will boost customer satisfaction through our continued ability to fulfill orders in just days, while also achieving a 20% gain in inventory productivity, which our recent investments make possible, and the teams are moving along well with this effort. We anticipate this will create meaningful gains in how efficiently we use working capital, plus cuts to costs tied to bringing goods in and storing them, and those benefits should begin showing up during the back half of this year. So, in short, we're happy that the numbers we posted came in above what had been forecast even with tough conditions around us. Our people make us very proud, and they continue to execute the strategic plans we've laid out, which allows us to keep strengthening our competitive position and powers our infinity flywheel. I'd also like to express real gratitude to Jack and Donna for the amazing way they've partnered with us, and it makes me very glad that we'll keep collaborating as they take on their new roles. Working with Keith is something I'm genuinely eager to begin as well. At this point, I'll hand things over to Donna so she can walk us through the results for quarter 1 and what we expect for fiscal '24. Donna?

Thanks, Mary, and good morning to all of you. I'll kick off my comments by walking through what we saw in the first quarter, and after that I'll share our outlook for fiscal 2024. Net sales rose $11.8 million, or 9.1%, reaching $141.2 million in Q1 of fiscal 2024, and that year-over-year gain came from growth across every channel; the improvement was bigger than what we had forecast for the quarter, mainly because Internet net sales came in above plan thanks to strong promotional campaigns, which moved some demand we had internally projected for Q2 forward into Q1. During the first quarter of fiscal 2024, our showroom net sales climbed by $2.3 million, which works out to 2.9%, reaching $83.6 million. In the comparable period last year, that figure stood at $81.3 million. The improvement came from an 8.4% gain in comparable showroom sales, driven by a greater number of point-of-sale transactions as well as deeper promotional discounting compared with a year ago, along with the net opening of 49 additional showrooms versus the prior-year period. Just to reiterate, the point-of-sale transactions captured in our comparable sales metric are orders made through our showrooms, and that timing doesn't necessarily align with when the customer takes control and net sales are actually booked. During the first quarter of fiscal 2024, net sales through the internet rose by $8.9 million, which represents a 28.7% increase, reaching $40.2 million. In the same period a year earlier, that figure stood at $31.3 million. Other net sales—covering pop-up-shop, shop-in-shop, and open-box inventory transactions—grew by $500,000, or 3.1%, hitting $17.4 million in the first quarter of fiscal 2024. A year prior, those sales totaled $16.9 million. Most of that improvement stemmed from 95 in-store Costco pop-up-shops, which generated $4 million in net sales that were absent from Q1 last year. The reason is that we only reinstated in-store pop-up-shops with Costco during the second quarter of fiscal 2023, after they had been halted in March of 2020 due to COVID. Another factor behind the gain was a deliberate $1.4 million bump in open-box inventory activity, which took first-quarter fiscal 2024 figures to $4 million, up from $2.6 million in the comparable fiscal 2023 period. Partially countering those improvements was reduced output from our short-term online pop-up shops hosted on costco.com. Relative to the same stretch a year earlier, we opened one additional Best Buy shop-in-shop site. Just to note, the open-box inventory deals we do with ICON are part of our CTC, DFL, and ESG programs. We're moving along well in evaluating all the possibilities for this returned merchandise that align with our sustainability objectives. Several of these programs should begin launching in Q2 and continue through the back half of the fiscal year. Until then, we might carry out certain open-box inventory transactions with ICON so our warehouses can operate at maximum efficiency, and if any net sales result, we'll report them on upcoming calls. Now, regarding product category performance in Q1, our Sactionals net sales rose 11.2%. Sacs net sales fell 10%, while our other category — decorative pillows, blankets, and other accessories — rose 4.2% versus the same period a year ago. Gross margin dropped 100 basis points, landing at 50.1% of net sales in Q1 of fiscal 2024, down from 51.1% a year earlier. The main driver was a 120 basis point decline in product margin, caused by promotional discounting that was higher than last year by design, partly offset by roughly a 20 basis point reduction in total distribution and related tariff expenses. That modest year-over-year decline in total distribution and related tariff expenses stems mostly from a 170 basis point inbound transportation gain tied to lower container costs, partly offset by 150 basis points of higher outbound transportation and warehousing costs stemming from increased FedEx rates and our growing warehouse network. As we told you during our fourth quarter earnings call, we anticipated modest gains from lower inbound freight rates in Q1, with the biggest impact coming in Q2 and Q3 of fiscal 2024. The 26.6% rise in SG&A year over year was chiefly tied to higher employment costs, overhead expenses, sales-related expenses, and rent. Employment costs climbed $5.9 million, fueled by added new hires in fiscal 2023. We saw overhead costs increase by $2.9 million. The biggest piece of that, $1.6 million, was tied to computer expense investments for our new point-of-sale system, which is designed to support both current and future growth. Rent went up by $1.4 million, primarily due to rent on the additional 49 net showroom. When looking at SG&A expense as a percentage of net sales, it climbed 560 basis points, mostly driven by planned deleverage in employment costs, selling-related expenses, and rent, along with ongoing investments to support current and future growth. Advertising and marketing expenses rose by $1 million, which is 6.4%, hitting $16.9 million in the first quarter of fiscal 2024, versus $15.9 million the year before. Advertising and marketing expenses represented 12% of net sales in Q1 of fiscal '24, versus 12.3% of net sales a year earlier. Keep in mind that advertising and marketing investments pay off across multiple fiscal periods. Depreciation and amortization rose $100,000 from last year to $2.8 million, mostly from capital investments in new and remodeled showrooms. The operating loss for the quarter came to $5.9 million, versus operating income of $2.6 million in last year's first quarter, due to the factors just covered. Net interest income was $300,000 in Q1, compared with interest expense of under $50,000 a year earlier. Interest income on our cash and cash equivalent balances benefited from higher interest rates than in the prior year period. Before we discuss net loss income, net loss income per diluted share, and adjusted EBITDA, please review the terminology and the reconciliation between each of our adjusted metrics and their most directly comparable GAAP measurements in the earnings release we issued earlier today. For the quarter, net loss came to $4.2 million, or $0.28 per diluted share, versus net income of $1.9 million, or $0.12 per diluted share, in the prior year period. In the first quarter of fiscal 2024, we recorded an income tax benefit of $1.3 million, compared with a $700,000 tax provision in the first quarter of fiscal 2023. That change in the provision is mainly attributable to the net loss for the quarter. On an adjusted EBITDA basis, we posted a $2.4 million loss this quarter, versus a positive $6.4 million a year earlier. Results for Q1 on that metric came in better than we had anticipated, largely because net sales were higher. Now on to the balance sheet. Total merchandise inventory sits right where we projected and has plateaued, which is what we told you about on the last call. Year-over-year, inventory came down 13%, and we're feeling really strong about the quality and the quantity of what we're carrying, along with our capacity to keep leading the industry on in-stock positions and delivery time.

Looking ahead into fiscal 2024, we anticipate that inventory positions will keep coming down, helped by lower inbound freight costs and the tech investments we've made that let us deploy stock more effectively. When Q1 closed, we held $45.1 million in cash and cash equivalents, plus $36 million available under our revolving credit line, with nothing drawn. We feel good about the strength of our balance sheet and where our cash stood at the close of the first quarter. For additional information about how we performed financially in Q1, please see our earnings press release. Turning now to guidance. As shown in that release, we're reaffirming our outlook for the entire year: net sales between $700 million and $740 million, roughly 30 net new showrooms, total comps ranging from high single-digit to low double-digit, adjusted EBITDA margins between 8% and 9%, and EPS of $1.83 to $2.24, based on 16.4 million weighted average diluted shares. With our robust Q1 results, taking into account what we expect in Q2, our touch point expansion during the back half, the introduction of our new angled side innovation together with the media backing behind it, our brand campaign celebrating 25 years, and that extra 53rd week, we stay confident about the full year outlook. Just to remind everyone, that additional week in Q4 should add about $6 million to net sales, $400,000 to adjusted EBITDA, and $0.02 to EPS, all of which is baked into our fiscal 2024 guidance. For Q2, net sales should land between $149 million and $151 million, propelled by roughly 7 planned showroom openings and a total comparable sales gain of 3% to 5%. The sequential decline in comp sales from Q1 to Q2 stems from a demand shift tied to promotional timing between the two quarters, meaning first half total comps as a whole fall inside the range of expectations built into our full year outlook. As we've noted previously, the first half of this year brings our hardest comparisons. Our Q2 projections factor in open-box inventory transactions that will be far below the $9.6 million recorded in last year's second quarter and no greater than our Q1 fiscal '24 open-box inventory net sales. We're looking for adjusted EBITDA of $1 million to $1.5 million, as an anticipated 200 basis point gross margin improvement gets more than outweighed by planned deleverage in marketing and advertising tied to spending on test-and-learn efforts, upcoming innovation, and events around Lovesac's 25th anniversary brand building. On top of that comes planned SG&A deleverage, mainly in payroll, rent, and credit card fees. For Q2, loss per share should come in at $0.12 to $0.16, with 15.2 million weighted average shares outstanding. We keep making significant investments in the business to fuel both current and future growth. Such spending is essential for us to fuel expansion over the long haul and keep taking share in the market. As I noted three months ago, since the back half of our year is typically when net sales peak, given when our new touch points open, when new products hit the market, and the inbound inventory flow we have planned, we anticipate burning cash across the second and third quarters of the year, then producing sizable free cash flow in the fourth quarter, so that fiscal 2024 closes with a cash balance much greater than a year earlier. Our first quarter performance came in ahead of what we had expected, and that makes us happy. We take pride in how our team executed amid what remains a tough macro environment. Going forward, we'll keep running the business with a sharp emphasis on growth and on investment discipline tied to ROI. Last, as you saw — this was announced earlier today — I've decided to step down as EVP and CFO of Lovesac, with that taking effect June 30. Being part of the Lovesac team for more than the past 6.5 years has been a privilege, and I saw the brand's growth up close, working side by side with our leadership team and the many gifted people across the company. Since Lovesac is well-positioned for success, I believed the moment was right for this transition, and we see Keith as the perfect fit for the job. In my new capacity as Senior Strategic Adviser, I'm eager to keep helping Lovesac succeed. I'll now hand the call to Shawn for a brief wrap up. Shawn?

Prior to opening the floor for questions, I'd like to pause once more and express appreciation to the devoted #LovesacFamily and our staff, who have demonstrated they can consistently surpass what's expected of them. These ongoing results that lead the category make us proud, especially given the macroeconomic conditions right now. Together with what we've observed in Q2 up to this point, these outcomes give us the assurance to restate our guidance for the entire year and to keep investing wisely in our programs aimed at fueling future expansion, even while we are clearly capturing a substantial amount of market share in actual time according to these figures. Once more, thank you to Donna and to Jack, both of whom have been essential to our capacity for delivering this kind of consistency across many years now. Each of them has devoted a portion of their life toward constructing what all of us believe can become an influential, valuable and deeply cherished brand, with decades of growth still ahead. We feel grateful toward them; they've provided our newer members and leadership with a sturdy foundation upon which to build, and we trust that we, yet again, have an excellent team assembled to keep the momentum going and push it further still. Having said that, we'll hand the call back to the operator to run Q&A.

To start, Donna and Jack, congratulations on retiring; working alongside both of you has truly been enjoyable. So here's what I want to ask — my question, I suppose, the opening one, when we discuss — regarding gross margins, perhaps you now have a clearer view into certain cost figures that are improving. I mean, what's the right way for us to consider gross margins going forward? Things have steadied somewhat, yet you continue to run considerably under the peaks seen historically.

Brian, when it comes to gross margin in particular, are you asking where we anticipate seeing the gains?

Okay. So when we look at how things might play out from this point forward, whether it's across the rest of '23 into '24, and perhaps the pluses and minuses? Is there anything new on that front?

Sure. Well, to begin with, I appreciate you giving me a shout-out earlier today. Regarding the pluses and minuses on gross margin, essentially, what lies ahead is a set of meaningful gains — as we mentioned, a 200 basis point lift in gross margin — and that is largely tied to the advantages flowing from reduced freight expenses that we incurred in the prior year; now we're simply realizing the upside as it hits the P&L during this year. That upside we're set to capture will be entirely realized in Q4, and we have strong conviction about that. We have very clear visibility on it. In fact, our container prices keep declining. However, what we continue to observe is a portion of, let's say, inland transportation expenses tied to — what we refer to as demurrage — which lies outside our control. It's essentially about moving the containers — after they arrive at U.S. ports to reach our own locations. So — where — you'll often hear that although container prices are dropping to $3,000, $4,000, there remain some extra expenses associated with the inbound movement of those containers, yet far lower than 12 months back when we were quoting 25,000; we're likely paying, all told, even including demurrage, something nearer to 5. So those expenses mean we'll enjoy the complete upside from that during the fourth quarter. So unless something unexpected arises regarding inbound container prices, the coming year will be an unencumbered one for us. That said, we do face certain headwinds, just like those other businesses in last mile — the FedExes of the industry and the UPS; we mostly rely on FedEx. Still, we're doing everything possible to offset that. Mary might mention a few other efforts we're exploring involving alternative carrier options; we in fact begin from a very — from a very favorable position in terms of our negotiations and pricing with FedEx. And as for warehousing, similarly, with rising labor expenses, we're encountering a modest headwind there; nevertheless, having said all that, everything is already factored into whatever guidance we've given, along with a bit of cushion to ensure we handle whatever might unexpectedly arise.

That's really useful, thank you. Now for my second question about sales. Donna, I believe during your remarks you referenced some volume being pulled forward, I think out of Q2 and into Q1 — could you help us quantify that and explain what it's tied to specifically? Then, on the sales side, we discussed promotional activity a bit — Shawn, you said promotions are still running above where they were a year ago, though they remain under their historical levels. Given how you see the business and this environment, would you think about leaning more heavily into promotions — increasing that activity further to support, I suppose, the ongoing market share effort?

This is Mary; regarding your first question about the shift Donna mentioned, one of the best things we're discovering is that promotions aren't always required at major tentpole moments. Our quote pipeline fills extremely quickly, and we actually ran a test of an off-cycle promotion essentially to generate somewhat more conversion; that happened near the end of April, and demand ended up well above our net sales for the quarter; so there was a modest shift, and part of that clearly reflects what Donna provided as guidance for Q2; and I think once more it comes down to the strength of our brand and our capacity to engage customers ahead of when they might otherwise be considering a purchase while competitors are running promotions. So we're feeling quite confident about quarter 2. As Shawn mentioned, we have a solid outlook, having gotten past, honestly, Memorial Day, the largest tentpole for us this quarter. And we're feeling good with a robust quote pipeline, healthy promotional cadence, solid in-stocks, and the teams are truly positioned to keep outperforming as we've shown each and every quarter. Shawn, on the promotions topic, I'll address it briefly and then pass it to you. The team keeps proving its ability to stay agile and to test, as the results make clear. We're extremely agile. We're actually improving at becoming more programmatic when reaching customers directly with quote rather than doing site-wide flashes. But as Shawn mentioned, broadly speaking promotions have stayed steady since the back half of last year. As our results show, we've outperformed everyone else by a wide margin; we keep gaining share, and all of that simply reinforces how strong our flywheel is and that we're a company-specific product cycle story, not a business driven by macro demand. So we feel good about the plans, though the teams will keep adjusting as needed.

Absolutely, that's right. There's nothing more I'd tack on, except to say we're going to stay extremely rigorous about this area; our attention is on growing the brand in the most long-term oriented manner we can, even when conditions get tighter, and that certainly shapes how we view promotions overall — we plan to remain highly disciplined.

Donna and Jack, wishing you both the very best moving forward; it was a pleasure collaborating with you. To start, do we have any signals about whether consumer behavior and perhaps discretionary spending has been improving or deteriorating across the last two months? Clearly, you restated your guidance for the entire year. Also, is there any additional detail you might offer regarding the higher-end shopper compared with those who are more sensitive to price?

Yes, wonderful to hear from you. I believe we clearly just — the update on the year-end came a couple of months back. Nothing we're observing stands out as meaningful compared to that, nor are there any steady patterns of trading down. In fact, what we're actually noticing is that they've generally shown a mix that's flat or marginally higher when it comes to premium upgrades in what they purchase. As we mentioned previously, we do observe the utilization of financing, and that keeps climbing relative to the prior year, something we had completely anticipated. And like other brands have reported, we're in fact seeing shoppers making purchases afterward, toward the conclusion of a promotional event, compared with the previous year. I believe much of that — a year ago, they were purchasing out of worries about availability, simply broadly across the market, and obviously, with that now more assured for the category, folks are hesitating somewhat. Yet I think that aligns with what everybody else has reported, and it's more of a return toward buying habits from before the pandemic. However, I think we also notice — and I believe Shawn mentioned this earlier, 38% of our customers don't even comparison shop with any other brand. So we — they arrive, they're ready to purchase, they apply the credit wherever they choose on the financing, yet the strength of the brand simply keeps going, as you're able to see in the results.