The Lovesac Company (LOVE) Earnings Call Transcript & Summary

Thank you. Good morning, everyone. With me today are Shawn Nelson, our Chief Executive Officer; Mary Fox, President and Chief Operating Officer; and Keith Siegner, Chief Financial Officer. Before we get started, I want to remind you that some of what we discuss will include forward-looking statements regarding future events and how our financial results will look down the road. That includes statements about our expectations going forward, our financial projections, as well as our plans and prospects. Actual results may differ materially from what those statements describe. To better understand these risks and uncertainties, please review the company's SEC filings, including the press release we issued today. You should not view forward-looking statements as predictions of what will happen. Each forward-looking statement made on this call is based on assumptions and beliefs we hold as of today, and we have no obligation to update them, except where applicable law requires. Our discussion today will also include non-GAAP financial measures, including EBITDA and adjusted EBITDA; these non-GAAP measures should be considered together with our GAAP results, not as a substitute for them or in isolation. A reconciliation of the most directly comparable GAAP financial measures to those non-GAAP financial measures is provided as supplemental financial information in our press release. Now, turning to our Second Quarter Fiscal 2025 results, I'd like to pass things over to Shawn Nelson, Chief Executive Officer of the Lovesac Company. Shawn?

Hello, everyone, and thanks for being here this morning. To begin, I'll give you a broad look at how our second quarter turned out and what we expect going forward. After that, Mary Fox, who serves as our President and COO, will walk through the main growth initiatives we're pursuing. Then Keith Siegner, our CFO, will take you through the financials and several other matters tied to our outlook in greater detail. Now, on to the Q2 highlights: we're happy to report outcomes that came in at or a bit better than what we had anticipated, with total net sales reaching $156.6 million and adjusted EBITDA of $1.5 million. Those figures show net sales rising 1.3% for the quarter, which tells us we keep taking share even as our category continues to face persistent headwinds. Our total omnichannel comparable net sales fell 5.4%, though contributions from new and non-comp touch points more than made up for that decline. Net loss and net loss per common share came under pressure from modest gross margin decreases and SG&A deleverage, partly balanced out by leverage in advertising and marketing — all of which we had foreseen and which lined up with the guidance we gave previously. What supports our performance is a highly productive omnichannel footprint, one rooted in our Designed for Life platform, strengthened by the affection shown through our customer engagement, amplified by compelling marketing, and bolstered by our growing emphasis on product innovation. As proof of that dedication to innovation, during Q2 we brought our PillowSac Accent Chair Frame, or PACF, to market successfully — it drew an amazing response and is exceeding what we expected. In fact, only a few weeks passed after launch before the Accent Chair Frame sold out. Let me offer a few highlights. The post announcing our PACF launch became Lovesac's best-performing single social post ever, racking up over 8.8 million views. Of the PillowSacs sold since launch, two-thirds were ordered together with an Accent Chair Frame. Excitement around the PACF carried over to the whole Sac business, which grew double-digits — up 25% — since we introduced the PACF. Looking forward, we're actively working on additional innovations built around this very successful offering, along with our wider Sacs platform. Yet maybe the most thrilling part is that the PACF has brought about incremental Lovesac market penetration. More than 50% of PACF purchases made since launch came from customers who already owned Lovesac products. And that's only the start of our plan to step up efforts aimed at generating more repeat business, which I'll cover shortly. With the PACF having succeeded, we're delighted to have just introduced the new AnyTable. AnyTable extends the unmatched adaptability of Sactionals into a table, and it marks Lovesac's first move into a neighboring furniture category — tables and case goods. AnyTable fits seamlessly into new and existing Sactional arrangements across many configurations, whether attached to the Sactionals or standing alone and linked to one another. You can expand it, modify it, and reconfigure it. It delivers style, functionality, and concealed storage, and it was engineered with upcoming innovations in mind. There's more ahead for the AnyTable platform. Three-wood finishes are now offered for AnyTable, coordinating with our just-redesigned Sactionals accessories: weathered gray, dark brown, and blonde. On the topic of accessories, we're rolling out a brand-new collection of reworked Sactionals drink holders and coasters, plus the completely new Sactionals tray, all in those same three-wood finishes that tie in with every one of the fresh wood designs from Lovesac. We're getting nearer to a real design perspective for the whole living room, and one day the whole home — if not each product category, then at minimum those that genuinely count to people and the way they go about their daily lives; we're fixing issues folks weren't even aware they faced, using products that are completely distinctive to Lovesac. And naturally, made to endure a lifetime, and engineered to adapt as lives shift. What you're seeing is our Design for Life model in action today: each item complements the rest, builds on top of them, and turns the customer's original Lovesac buy — which might date back several years — into something more useful and more valuable than it was at purchase. No other home brand takes this approach to design or marketing, and we have much more coming. Through these introductions, along with plans for several additional, smaller releases later this year and a big one in fiscal 2026, we're gaining momentum; they'll open up more rooms within the home for us and extend our footprint. Pair that audience with the CRM and omnichannel capabilities we've been building out over the last several years, and we see a massive chance to drive much more repeat business from customers down the road. Before we get into the outlook, aside from the new products we've been working on, there are some really exciting partnerships happening at the moment. To start, we were thrilled to kick off our tie-up with KidSuper, the Fashion Phenom brand, just a couple of days ago during New York City's Fashion Week. So keep an eye on pop culture, fashion, and Fashion Week to catch where Lovesac turns up in the most cutting-edge outlets out there. At Lovesac, innovation is part of who we are, and when you combine that with the strength of our Designed for Life platform, our convenient omnichannel approach, and compelling marketing, we're continuing to take share even as the industry and category environment remains difficult. That approach isn't changing, and it remains our objective regardless of what's happening in the broader economy. Now, obviously, everyone would welcome rate cuts that could give our category a lift, and that might happen; however, based on real spending figures and how promotional things have been in the category lately, we believe the wise move is to keep our industry forecast where it is for now. Because of that, our forecast continues to factor in a 10% decline for the category compared with a year ago. With that broader backdrop in mind, and given where things stand seven months into our fiscal year, we are narrowing the range we've given for net sales. The middle of that range sits slightly below the prior one, but it still reflects an increase over the course of the fiscal year. We remain well positioned to achieve what we set out to do both this year and beyond. Should circumstances change, our teams can adapt quickly and act at speed, and we have the ability to go after growth. In closing, the people on our teams are the heart of all our daily work here at Lovesac, and I want to express appreciation for how they keep committing themselves and delivering steadily while we continue navigating a consumer environment that never stops shifting. Because the addressable market is large and highly fragmented—and our current share within it is quite small, even across the platforms we already have—Lovesac has a lengthy and attractive runway for growth. The stronger position we now hold in the market, a profitable operation that keeps getting bigger, and a debt-free balance sheet together allowed us to announce the share buyback authorization, the first one in our history. As Keith will go over, we plan to keep running and allocating capital carefully, centered on achieving long-term sustainable profitable growth that ought to generate value for every one of our stakeholders. We're eager to share more about our long-term vision at an Investor Day, which we're aiming to hold in our fourth quarter; so watch for further information. With that, I'll pass it to Mary to go through our strategic priorities and progress in greater depth. Mary?

Thank you, Shawn, and good morning to all of you. As Shawn mentioned, we're glad to report second-quarter results that matched our guidance, even with the category still under pressure. What matters is that net sales rose compared with a year ago, and looking at a five-year view, they stand 225% above where they were before the pandemic, while the category over that same span has been roughly flat. During that same period, our adjusted EBITDA margin is up 430 basis points. In quarter two, we beat the category and took market share, supported by our focus on customers and products along with our distinctive omnichannel Infinity flywheel; we've created a business model and platform that no one else in the category has, which gives us a sizable total addressable market opportunity, strong and rising brand health, best in class touch point economics, and a supply chain advantage. We keep drawing benefits from disciplined spending on our strategic initiatives and capabilities, which widen our addressable market and lift underlying profitability. Now I'll walk through the main highlights of our forward plans for each strategic initiative. First, product innovation — we're glad to introduce several strong innovations this year, beginning with the PillowSac Accent Chair in May. Let me add a few points past what Shawn already covered. Our marketing team brought this distinctive innovation to life by using our Architectural Digest partnership via a 360 degree campaign spanning digital marketing, PR, influencers, and social media, creating excitement and intrigue among consumers, influencers, and media; we generated over 2 billion earned impressions and more than 500 media placements, which built buzz and news not just for the PillowSac Accent Chair but for Lovesac, the brand. We're taking the learnings from that whole process to sharpen how we approach every upcoming innovation launch. The PillowSac Accent Chair is also a strong test for generating more repeat customer business. Current PillowSac owners have been purchasing the Accent Chair Frame, which lets them enjoy their Sac in a fresh way, and lots of them are picking up multiple covers to really accent their rooms. Whether boucle, plush furs, or even seasonal covers like the top selling limited edition pine quilted velvet. It's an enjoyable way to bring in interest and style, and to appreciate the flexibility built into every product Lovesac makes. We see a huge opportunity to capture this and generate additional lifetime value through future innovations. Riding that momentum, we've just rolled out the year's second innovation, AnyTable, with the third coming right after in the newly redesigned Sactionals accessories platform, which includes the Sactionals drink holder, coasters, and a far more contemporary tray. Our teams are incredibly excited to bring these to our customers and are already off to a strong couple of days. We'll keep honing our launch program and repeat customer outreach, which puts us in an ever more effective position ahead of much larger launches still to come. Our material innovation launch is set for early Fiscal '26, and we believe it will widen the field considerably when it comes to where we play in the couch category, which in turn should let us pick up market share at a faster pace. As launch gets nearer, we're eager to tell you more; on Monday we rolled out a first-of-its-kind partnership that brings together Lovesac's creative strength in furniture design and one of today's most gifted and buzzy fashion designers. Through our work with the disruptive fashion label KidSuper, we've introduced a limited edition line of home furnishings that fuses our cloud-like coziness with forward-pushing streetwear. At the center of both this collaboration and its campaign sits our PillowSac Accent Chair, which showcases KidSuper's signature Kissing Design. This trailblazing collaboration makes us quite proud, and so does the buzz and enthusiasm surrounding the launch event, whose coverage exceeded what we had anticipated. Number two is our omnichannel experience. By blending our physical locations with our digital platform, we keep reinforcing our standing as a genuinely omnichannel retailer. To begin, we opened 10 touch points during the quarter, and we're still set to hit at or slightly above 30 new showroom openings across Fiscal '25. Next, over the quarter we rolled out a set of website upgrades that foster lasting ties with both new and current customers and back our goal of delivering a best-in-class omnichannel experience; we rolled out substantial upgrades to My Hub, a single spot on lovesac.com where pre- and post-purchase journeys happen seamlessly. In quarter two, the emphasis was on delivering richer personalization of the shopping journey that mirrors touch points more closely, letting the customer conveniently and smoothly add to, tweak, or otherwise reconfigure their Lovesac wherever, whenever, and however they like; account creation has risen considerably as a result, handing us a bigger chance to connect with the customer in ways that feel more personal and pertinent. For Lovesac, forging lasting ties with our deeply engaged, addressable base of current customers stays a major opportunity and a central strategic priority as we keep rolling out new products that slot into what they've already bought. Early results look very strong, showing that customers are taking well to these fresh features. Our re-platforming to Adobe Edge marked the next thrilling website upgrade, a technologically advanced platform experience that markedly boosts website performance along with data and software integration. A website that performs better helps not just the on-site experience but also Seo and organic search. We're already noticing meaningful gains in those areas, plus better online customer conversion. Crucially, because of our distinctive omnichannel experience, our customer satisfaction scores keep getting stronger and rose sequentially in quarter two, particularly our digital experience. Those scores climbed year-over-year to the highest levels we've ever recorded. Number three is our ecosystem, built around winning over, pleasing, and sustaining relationships with loyal, loving customers. We keep utilizing our marketing mix and spend, particularly through the Memorial Day and July 4th share events, along with better efficiency in return on ad spend and cost per acquisition. Going forward, we'll actively experiment across media to fine-tune our investments for growth, particularly given chances in video, connected TV, search, and audience targeting, plus growing our brand awareness. We still face inflationary cost pressure, particularly in paid search, yet we've become remarkably efficient at bringing the right audience into touch points and to the website, which yields higher conversion rates. We're also thrilled by our progress extending reach on YouTube as an additional tier, not just for brand awareness but across the whole purchase funnel. During quarter two, we kept succeeding at marketing to current customers and experienced robust growth in their transaction count; during quarter two, we finished the infrastructure requirements needed to roll out our first phase of offering services. Last week, we introduced our resale platform, piloting with our own associates ahead of a customer facing experience launch soon. We're quite enthusiastic about our advancements in this key area, using open box inventory to power our endeavor and continuing to build on our promise to create products that are designed for life and supported by circular operations. Now, lastly, making disciplined infrastructure investments and driving efficiencies. During quarter two, we achieved material cost of goods and inbound freight improvements via prudent management and planned infrastructure investments, in both capabilities and technology, whose benefit we keep realizing. As we mentioned at the start of this year, we upgraded our inbound logistics strategy, shifting from a freight forwarder model to a direct carrier relationship, reducing our reliance on spot rates; this has helped us through both better overall pricing and container availability, while de-emphasizing the spot market pricing inflation, and it amounts to significant cost avoidance. From a growth margin standpoint, these savings were offset by an increase in promotional discounting during the quarter, since we continue to see higher promotional levels in the category. We also achieved a 16% reduction in total inventory at the quarter's end, driven by the benefits of recent investments, including our new order management system. We're making strong advancements in our outbound logistics model, and we've successfully brought in local parcel providers in one key market, which helps deliver overall lower costs and improved customer satisfaction. We'll keep expanding this program throughout this year and beyond; so, in summary, we're pleased with the progress on our strategic priorities as we continue to successfully expand the business and make important foundational investments to drive, as well as support, the substantial growth that lies ahead. I will now pass the call over to Keith.

Appreciate that, Mary. We'll dive straight into a brief look at the second quarter, and then we'll cover what we expect for the remainder of fiscal '25. In Q2 of fiscal '25, net sales rose by $2.1 million, which is 1.3%, reaching $156.6 million, up against the same period last year. That matched our guidance and showed that we keep picking up market share, thanks to growing both our physical and digital presence, effective promotions, new product launches, marketing efforts, and the outstanding experience we deliver to customers across every channel. For the second quarter of fiscal '25, showroom net sales reached $98.8 million, an increase of $0.6 million, which works out to 0.6% growth compared with the prior year. That gain was driven by 31 net new showrooms being added, although a 5.4% decline in omnichannel comparable net sales partially offset it. We have seen certain week-to-week fluctuations tied to the timing of holidays, promotions, and product launches, yet the trends underneath have remained relatively consistent. Internet net sales for Q2 of fiscal '25 totaled $44.3 million, up $2.9 million, or 7%, from the equivalent period a year ago. During Q2 of fiscal '25, other net sales — the category that includes pop-up shops, shop-and-shop, and open box inventory activity — came in at $13.5 million, down $1.4 million, or 9.3%, compared with the same stretch a year earlier. The main driver of that decline was weaker performance from our temporary online pop-up shops on Costco.com. One thing to keep in mind: going forward, we may engage in a limited amount of open box inventory transactions with Icon so that our warehouses can operate as efficiently as possible. As we noted last quarter, and as also held true in Q2, we believe the quarterly run rate from fiscal '24 can serve as a potential baseline for your models, which works out to approximately $12 million for the fiscal year. Turning to what we sold by category during Q2: Sactional brought in 2% more in net sales. Sac net sales held steady, which was our strongest showing in several quarters, and that's largely because the PillowSac Accent Chair did so well. It's encouraging that PAC sold out on strong demand, leaving us with some backlog, and at this point we expect net sales to match up with demand sometime in Q4. Meanwhile, our remaining net sales — decorative pillows, blankets, and accessories — fell 15% compared with the same period last year. In the second quarter of fiscal '25, gross margin decreased 80 basis points, landing at 59% of net sales, down from 59.8% during the equivalent quarter a year ago. The primary driver was a 110 basis point drop in product margin stemming from more aggressive promotional markdowns, along with a 50 basis point increase in costs for outbound transportation and warehousing. An 80 basis point decrease in inbound transportation expenses provided partial offset. SG&A costs represented 47% of net sales in Q2 of fiscal '25, compared with 41.3% a year earlier. This elevated ratio largely reflects spending on payroll, equity-based compensation, professional fees, rent, and infrastructure. Higher SG&A costs were driven primarily by several items: a $6.4 million increase in payroll, $1.5 million related to equity-based compensation, $0.9 million for professional fees, $0.7 million in rent, and $0.5 million spent on infrastructure investments aimed at supporting both current and future growth. The rent increase of $0.7 million reflects a $1.2 million rise in rent expense resulting from our net addition of 31 showrooms, which was partly offset by a $0.5 million decrease in percentage rent. During Q2, we figure that around $1.9 million in one-time, nonrecurring fees tied to restating earlier financial periods were incurred; forecasting these is quite challenging, and for the last two quarters they've exceeded what we initially projected for fiscal '25. Each quarter, we'll keep calling out any such charges if they come up. For advertising and marketing expenses, they fell by $3.2 million, a 12.2% drop, landing at $23.3 million in the second quarter of fiscal '25, versus the same period a year ago. During Q2, the amount we spent on advertising and marketing came to 14.9% of net sales. In the same period a year earlier, that figure stood at 17.2%. The drop in that percentage stems mainly from expenses tied to our 25th anniversary campaign during fiscal '24 that did not carry over into fiscal '25. We posted an operating loss of $8.4 million for the quarter, versus $1 million in last year's second quarter, which resulted from the factors we just went over. Before we move on to net loss, net loss per common share, and adjusted EBITDA, we'd ask you to look at the terminology and the reconciliation between each adjusted metric and its most directly comparable GAAP measure, all of which appear in the earnings release we put out earlier this morning. For the quarter, our net loss came to $5.9 million, which works out to negative $0.38 per common share. In the same period a year earlier, the net loss stood at $0.6 million, or negative $0.04 per common share. We booked an income tax benefit of $1.8 million in the second quarter of fiscal 25, versus less than $0.1 million a year earlier. Adjusted EBITDA totaled $1.5 million for the quarter, compared with $5.3 million in the prior year period. Now looking at our balance sheet, we closed out the second quarter in a very healthy position. To start, we reported $72.1 million in cash and cash equivalents, roughly flat on a sequential basis and up nicely from a year ago. Next, the amount of product we have on hand matches what we had forecasted. We're very pleased with how good our inventory is in terms of both its quality and its size, and with our capacity to keep in-stock levels and delivery speeds that lead the industry. Finally, I'd like to give you an update on our credit facility. When the second quarter wrapped up, it had $36 million in committed availability, with nothing drawn. In Q2, we were able to complete the amendment and extension of that facility. It now runs through July 27, 2029. We brought in an additional $10 million of uncommitted capacity — that's an accordion feature — and we also improved many other parts of the agreement. Taken together, this change gives Lovesac even more room on the financial side to keep putting money into the business and still return value to shareholders. Along those lines, we were glad to share news of a first-ever buyback program. Our Board of Directors approved repurchasing as much as $40 million in outstanding common stock, which we expect to fund from cash on hand and free cash flow we generate later. When, how, at what price, and in what size any buybacks happen depends on numerous factors, and our approach will be disciplined yet ready to seize opportunities. For a bit of basic context, our initial estimate is that we offset stock compensation dilution at a minimum. We're eager to talk through more with all of you over the next several quarters. For additional information about our second quarter financial performance, please see our earnings press release. Turning now to our outlook: near term, our goal is growth no matter what the category does, extending our history of taking share. Beyond that, we're positioned to benefit from a category recovery the moment it arrives, and faster than competitors can. When that happens, the extra revenue ought to produce growing flow through from top line growth into bottom line growth. To be specific, our baseline assumption of a 10% category decline for the full year is unchanged, and it's what supports our fiscal '25 outlook.

During the first half of the fiscal year, the category dropped by roughly 12%, which was pretty much in line with what we initially assumed. That assumption also anticipated somewhat improved category conditions in the back half compared with the front half. Once more, if the category does better, we'd anticipate doing better ourselves, and the reverse holds too. When it comes to the complete fiscal '25 year, we're narrowing the ranges in our guidance. Our projection for net sales is $700 million to $735 million. We anticipate adjusted EBITDA in the range of $52 million to $59 million. That figure incorporates gross margins between 58% and 59%, advertising and marketing at about 13% of net sales, and SG&A at roughly 40% of net sales. We project net income in the range of $17 million to $21 million. Our estimate for diluted income per common share falls between $1.01 and $1.26, along with roughly 16.9 million estimated diluted weighted average shares outstanding. Just to remind everyone, fiscal '25 will have 52 weeks, whereas fiscal '24 had an extra 53rd week during the fourth quarter. Turning to the fiscal third quarter, our net sales estimate is $152 million to $160 million, which would mark yet another quarter of marginal growth at the midpoint. We anticipate adjusted EBITDA ranging from a loss of $3 million to income of $1 million. That includes gross margins of about 58%, advertising and marketing at approximately 15% of net sales, and SG&A between 45% and 47% of net sales. Our net loss estimate falls between $4 million and $8 million; basic loss per common share is projected at $0.28 to $0.50, with 15.6 million weighted average shares outstanding. I want to spend a moment getting ahead of the question about the implied acceleration in net sales growth for the fiscal fourth quarter relative to the fiscal third quarter; we're projecting sequential growth acceleration because of a handful of factors. First, there's catch-up on demand shipments for PillowSac Accent Chair and StealthTech, since both experienced shipment delays caused by longer lead times. Second, new innovation that recently launched will get a full quarter of sales along with greater awareness in the fourth quarter, while a year ago new innovation mostly helped the third quarter after Angled Side debuted. Finally, we're forecasting a slight category uptick from Q3 to Q4, though it's obviously still declining as rates start to come down and election-related uncertainty fades after the election; in short, category stabilization and an eventual return to category growth lie ahead of us. In the interim, even as category declines persist, we think we can strike a balance between growing revenues and profitability while investing in foundations and product innovation, which puts us in the best position to create stakeholder value for many years ahead. At this point I'll hand the call back to the operator so we can begin our Q&A session.

Alright, thanks. My question about that Q4 ramp has already been covered by you — it still looks pretty aggressive to me, even if I guess I get what's driving it. So, if I can ask something further on that, might you quantify how much pent-up demand you're seeing for the new Accent Chair and StealthTech? What was the length of those delays? My assumption is that you've got considerable visibility into a chunk of that revenue, so could you just size how much of it feeds into that Q4 ramp?

Yes, certainly, Mike. So, that impact started landing in Q2, near the end of Q2. A little more will be picked up through Q3, and then in Q4 it's fully settled. It comes to millions of dollars, but it lands in the single digits — so single-digit millions of dollars in transfer that will be recovered in Q4. Our visibility is very strong on when those lead times end and when shipping becomes possible, so that's a number we feel quite confident in. And separately, on the promotional side, we're looking at 30% off.

Alright, I appreciate that, it helps. Just two or three more quick ones—at least the sector stats we monitor have begun improving somewhat, and I believe you hinted at the same thing, simply because rates have dropped. Are there any positive signals, anything you could mention perhaps regarding mix or the upper end compared with the lower end, or any indications early on that mortgage rates falling significantly could be benefiting your operations, or at minimum providing some clarity about how the second half might look?

Wait, just a moment. I believe Shawn has his line muted.

I figured that one had you stuck.

Not at all—just give us a moment. He'll be here shortly.

Sure, the most accurate way to describe the current state of our business is that Lovesac has spent a very long stretch in expansion mode. When we examine what competitors are doing, the level of promotional activity has genuinely taken us aback, correct? That stands as one of the — at this point, one of the strongest indicators of what is happening across the industry; as for Lovesac, we have worked hard to maintain our position regarding where our own promotional levels sit, and the durability the business has shown has left us quite satisfied. Given that, claiming we can spot any real green shoots is difficult. We stay extremely watchful about how we map out the business from one quarter to the next, even from one month to the next; and clearly, everyone is monitoring the macro picture. All of us note that interest rates are probably going to decline, which ought to influence this category. However, if you want our perspective as the management team, it is to remain truly cautious about when that impact could actually appear. So from our standpoint, for the time being it is simply more of the same. Beyond that, our business enjoys the advantage of innovation, right? You brought up green shoots. I believe part of why we keep proving resilient, to be fair, is that we keep introducing new products that generate fresh momentum for us, such as the PillowSac Chair Accent Frame, which fuels repeat purchases and, naturally, new purchases too, like the AnyTable that only became available this past week. So for us, these represent inorganic, or rather, non-cyclical sorts of opportunities that we are generating on our own, yet when it comes to industry green shoots, what we have right now is closer to a steady holding pattern.

Mike, one more item — a single data point — in case you find this interesting. So during this year, we've noticed some notable patterns in how the Lovesac Credit Card program is being used, which is essentially the financing option our customers rely on. At the start of the calendar year, we informed you that we had observed declines in the share of revenues going through the program, especially among the low end consumer, and that then leveled off across several months. But after that, we encountered these shifts that hit the entire industry — nothing particular to Lovesac — tied to program fees that many banks put in place on programs of this kind. This quarter, the second quarter overall, we wound up seeing utilization of the credit card, as a percentage of revenues, come in several 100 basis points below what we had previously. And it genuinely appears tied to how that program fee was implemented. So we're collaborating with our partners on this, attempting to determine what effect it had on our demand trends overall. How can we adjust our offers so we remain as relevant as possible — perhaps through shorter duration, deferred interest offers, that sort of thing — to ensure we're putting forward the most compelling offer we can as we move into the back-half of the year. So look, should rates begin to decline, and consequently implied interest fees begin to decline, all of that will be helpful too. So we'll manage this, but I wanted you to be aware that following that implementation, we've recorded a decline of a couple of 100 basis points in our utilization rate.

Yeah, that's an intriguing point. Thanks for the details. One more brief question: does your outlook factor in any repurchases? You mentioned that you anticipate it will counterbalance dilution, but specifically, as we build our model, should repurchases be part of our projections? And on a broader note, how did that choice come to be? We're aware some shareholder letters were penned during the quarter, so we're just trying to grasp the buyback rationale a bit better.

To provide a bit of context, talks have been ongoing with management and the Board for a good while. As we've mentioned on earlier calls, a certain order had to be observed, which involved handling the credit facility's upcoming maturity prior to adopting a shift in capital management approach. So, the credit facility had to come first. With that now complete, I believe the takeaway is that we're quite confident in the balance sheet's strength and how we're steering and equilibrating both the present circumstances and the wish to keep financing all this truly potent innovation, part of which you've witnessed and additional parts are on dotcom. We haven't incorporated any into the projection; that initiative was simply expanded. I did mention on the call, and this is likely the full extent of what I can share today, that we're considering countering the dilutive effect of equity compensation as a solid, sensible baseline. Achieving that would need under $10 million annually. So, when considering your models, that's likely a sound starting point.

Thanks. I really appreciate you making the time.

Hi there. Morning, and thank you for fielding my questions. To start, I'd like to revisit the guidance you gave for the entire year. Since Q2 landed roughly in line with what was expected, perhaps even a touch above, could you share your thinking on reducing the width of that guidance, particularly at the top end? It also looks as though a bit of sales is moving out of Q3 and into Q4. Still, when we consider the outlook for the whole year, is there anything that looks different to you today compared with, say, the prior quarter?

Not particularly. We feel quite confident about our innovation, yet uncertainty in the macro backdrop persists, particularly as this election approaches. Promotional activity has also ramped up, and you heard Shawn mention this earlier; we've observed certain rivals stretching out and raising promotional levels across the — what was notable at a macro level, and if you examine some of the figures available, headline promotions came in a bit above what they were at Labor Day, and a bit above what they were at Black Friday a year ago. So, we're simply aiming to stay pragmatic, factoring in all of this. There aren't any truly significant shifts beyond that, and we judged it wise to narrow the range.

Maria, thanks for that. Okay, so first, could you bring us up to speed on where you currently stand regarding the ideal count of showrooms, and perhaps all the other ways customers connect with the company? Also, any insight you might offer on the extra lift in revenue and brand recognition that comes from launching additional showrooms at present, relative to what it was, say, 2 years back?

Yes, hello Maria, and thanks for asking such a good question. What we've consistently communicated is that we foresee room for a bit more than 400 showrooms. And clearly, based on what we're seeing this year, we expect to deliver roughly a net 30. So that potential remains visible to us. Our model gets updated constantly whenever we consider our approach to the market. So we feel quite confident about that room to grow. The second element, which you correctly pointed to, is that whenever a showroom opens, we also observe an added spillover effect benefiting our online operations. And as the share of our business coming from those channels keeps expanding, especially involving certain technologies we've introduced, like what I mentioned regarding My Hub, the two really reinforce each other; this lets you generate sales not only through the showroom but also more widely across every channel combined. For us, showrooms genuinely serve to build awareness, and we recognize that a great many customers wish to visit and physically sit on our couch and try our product. Something notable, Shawn, when we discussed the PillowSac Accent Chair, is that it generated excitement across the entire brand. Folks visited the showrooms to check out this new item, and afterward they'd say, hey, these Sactionals are neat, so they sat through a demo and purchased the Sactional. There's simply so much potential when you return to considering our flywheel, and the capacity to demonstrate, let people try the product, and introduce fantastic innovation that builds enthusiasm for the brand. We perceive a lengthy path forward, so we're quite pleased with how things performed this year and clearly with what's planned for the coming year.

Understood, that's quite useful. Thanks, Mary, and thanks as well, Keith.

Excellent. To start, Shawn, Mary, and Keith, congratulations on the quarter. I've got a single question plus one follow-up. Shawn, could you share your present thinking regarding the approach you take to creating new products? What's your view on new lines like StealthTech, and on adjacent items like AnyTable?

Sure, I appreciate that, Tom. Above all else, as we have stated over the years, our design for life concept anchors all of our activities, and just so everyone is following along, this refers to goods made to endure for an entire lifetime and engineered to change over time. In our view, this perspective is entirely without parallel in the marketplace. We can't identify any other home businesses, or honestly any other product businesses, that could match that sort of philosophy, and it extends past what we sell. It genuinely shapes our approach to business. All of our upcoming efforts around services, trade-in, and trade-up, all of which we've discussed previously, truly benefit from this design for life approach to operating. Having said that, I want to restate a point we've made in the past, though not lately. We consider our domain to span from the mailbox all the way to the backyard fence, correct? And we adopt a quite lengthy perspective regarding our company. We feel we are creating a brand that will endure for many, many decades and be deeply cherished owing to our dedication to the ethos I just outlined. So for the time being, we have remained quite concentrated on the living room, with Sactionals plus extensions to Sactionals, among them the latest AnyTable introduction. It is a Sactional, and it can connect with Sactionals, for example, yet it can likewise function independently as a coffee table. Simultaneously, AnyTable was engineered to accommodate upcoming innovation, and that's among the aspects I take the greatest pride in. It possesses traits, measurements, and various components that might let AnyTable eventually become a platform of its own and expand into additional extensions and case goods, and so on. Yet it also lets us, in the closest term, remain tightly concentrated on a business that keeps performing well and genuinely captures market share in a strong manner. That, naturally, is the Sactionals business. So right now it's sort of a hybrid product, and it does carry the chance to develop into larger and wider things. Regarding venturing into additional rooms, say elsewhere in the house, or across that mailbox-to-backyard span, that will arrive. And we are currently working on development, patents, and prototypes in other areas beyond the living room. Still, in the closer term, we stay quite focused, and I believe time favors us. If we were to roll out the next big thing in a brand-new category right now, honestly, would anybody even notice? It's not only factors like the election — it's where the economy stands, where this category stands. There's no way to say it too strongly: what we're going through in the home category is worse than 2008, 2009, and 2010. And fortunately, we're well past a few years into it. So I don't want to sound glib, but Lovesacs has come through it in good shape, and that has genuinely given us room to keep pushing hard into innovation — the kind I'm only hinting at — at a moment when I believe a lot of our competitors have gone through layoffs and likely cut back on much of this sort of thing. And I believe that will let us come out of this strong as the world keeps shifting and evolving and this category keeps shifting and evolving. So we've got both hands on the wheel, everyone focused on innovation, and we're genuinely excited about what lies ahead and genuinely enjoying this chance to invest this way in the business, even while of course we keep a tight grip on expenses and keep trying to produce profits and cash. So innovation is what pushes us forward, and we can't be — it's what gives us energy, and we truly can't wait to share more with you at the upcoming Investor Day. That's probably the moment — and your opportunity — to get the clearest picture, and for us to be a bit less vague about what's ahead.

Great, and as a second question, could you discuss gross margins along with contribution margins for newly launched items like the PillowSac Accent Chair and AnyTable? My assumption is that contribution margins would be pretty strong, since absent direct promotion of those items — my sense is that in the past, at least with StealthTech, you promote the Sactional, yet then folded it into that promotion. So I would welcome your perspective on this.