The Lovesac Company (LOVE) Earnings Call Transcript & Summary

All right. We are going to get started. Good morning, everyone, and thank you for joining us here today. I'm Maria Ripps, Internet analyst at Canaccord Genuity. And it's my pleasure to introduce Shawn Nelson, Lovesac's Founder and CEO; Mary Fox, President and COO; and Keith Siegner, CFO. Shawn, Keith, Mary, thank you so much for being here with us today.

Great to be with you all, thanks.

So maybe just to start off, last year was a solid year for your company as you continue to gain share in the face of a challenging macro backdrop. Maybe for some of the people in the audience who are newer to your story, let's start by talking about sort of key tenets of your value proposition that enables you to sort of continue to gain market share.

Yes. So as Founder and CEO, I'll give the briefest background on Lovesac. This is a company that started in my parent's basement as a giant, not bean bag company that was my side hustle in college. We opened a store in 2001 and kind of exploded locally and quickly discovered that the couch in the corner of those stores to make these $1,000 foam-filled not bean bags look pretty was always on people's minds. So years later, invented a solution for that called Sactionals, which is a couch you could have with you the rest of your life. You can grow it and change it, rearrange it, change the fabrics, all these things. And that led us to the design principle that underpins everything we do today and I think makes us the most competitive kind of disruptor in the home furnishing space, if you will, and that's called Designed for Life. And obviously, that's what is the underpinning for our logo. And what this means is products that can be with you the rest of your life because they were built to last a lifetime, like our couches are, and they were designed to evolve with you as your life changes. And so the best embodiment of that are these Sactional sofas that now you can arrange and rearrange and grow and change. We've added everything from StealthTech, home audio solution that can also charge your phone by putting your phone on the arm of the couch invisibly provide Dolby 5.1 digital surround sound, you can expand that to 7.1, 9.1, 9.4 daisy chain subwoofers, all hidden inside the couch. And all of these attributes make this the most, I think, competitive player in the sectional category and that's what's driven the bulk of our growth for a number of years as we continue to layer on additions to this platform through this Designed for Life evolutionary approach. The pieces that you bought many years ago can be augmented by our new solutions and additions. Most recently, the recliner, which is 1/4 of the Sactional category is Sactionals that could recline. We were locked out of that for many years, not having one, and we just launched that a few weeks ago, and it's been doing fantastic, and we're really excited about that. And it's just an example of how you can add and augment to this platform. So this Design for Life ethos now will lead us into other realms, which I'm sure we'll get into as we've recently announced the expansion to more furniture and home categories in the future for Lovesac.

Great. That's a great overview. So in December, you sort of highlighted some softness with conversion, especially as it relates to larger setups. To the extent you can comment, what have you seen sort of with that segment of consumers? And maybe more broadly, what are some things that you can do to sort of improve conversion when a customer is ready to transact and maybe is a little bit hesitant to complete the transaction?

Yes, I'll let...

Yes. I think, do you want to start?

Sure. I'll take this one. So our business is really unique in that it's a process of education and experience that the customer goes through very often before they purchase. So they come and then they go through a demo and they see how it works, that you could piece together these really high-quality pieces into anything you can imagine, any shape, any design, any configuration. So folks come in to one of our physical touch points. We have about 300 of them, and they go through this experience and they get what we call a quote, which is an omnichannel digital summary of what they designed with our associates. They can then close that anywhere. So we have very good visibility into that kind of relationship we have with consumers because of this quoting process. We, in the Black Friday holiday period, had very solid growth in that quote pipeline. It was a low double-digit growth year-over-year, so very encouraging. We did experience some lower conversion than we were used to and then we were expecting of that quote pipeline. And that's what you're asking about. So there are a number of factors that could have contributed to this, and we are getting after all of those. So the reasons for that, like lower conversion than maybe we expected can be a few things. It can be the short holiday period between Thanksgiving and Christmas. And while that might sound weird to you, but I'll give you an explanation of why that can matter. We ship in 1 to 2 weeks. Everything you order comes in 1 to 2 weeks. So for us, December is a relatively quiet month because if you order in the beginning of December, you might get your new Sactional right before Christmas. So we have a big holiday period sales in November. And because of that compressed time line, that delivery of your new Sactional is getting very close to the holiday. So that could have been part of it. Another part of it could have been heavy promotional intensity in this category. We saw year-over-year increases in the promotional intensity of many of the alternative offerings that you might consider. And we are managing a brand for the long term for all the reasons Shawn just discussed. And so we do use promotions. We use them intelligently, but we did not go to that next step, that very high 40% or more level of promotional discounting because that's a slippery slope, right? We're seeing great conversion, generally speaking, at that 30% kind of headline discount. We've seen that yearly even in recent weeks. And so we held the line on that. And I think these are probably some of the characteristics that played the biggest role. One other thing was we introduced a bunch of new products, such as the recliner and those were not on discount for the holiday season. So the core engagement with the customer, the excitement of the customer, the double-digit growth in the quote pipeline was there. Those are some examples of what could have led to less conversion of that quote pipeline. It was a very brief period a couple of weeks at the beginning of our quarter, and we are aggressively going after converting that quote pipeline going forward.

And Keith, I think yesterday, we talked about how there are a few things you can do to improve sort of this near-term engagement. Can you maybe just address that for the audience?

Yes. No, let me take that. So I think back to what Keith said, because the customer is very engaged with us, because we have their data, we have their e-mail address, our teams have built a relationship with them. So we are able to drive personalized offers to them. Our teams can engage with them either through the phone, text. We've also been investing for the last couple of years building at our CRM capabilities. So we can go one-to-one in our relationships. And I think where we really -- we saw great conversion across many of the configuration sizes. But to Keith's point, we really saw it on the bigger size of the configurations that people are buying into. And invariably, they're the ones that are buying all the innovation. They love the recliner and all the other things, but those weren't on promotion because we wanted to understand what that metabolic rate would be at MSRP because we're going to be selling this product shown for many years. And if we don't learn how that performs, then we don't know strategically how to be able to build that out for that growth. So the teams, we have one-on-one relationships with the customers with our teams in the showrooms, and they get after things in just a matter of hours. So we're very grateful for their agility and the drive to be able to get that closure through.

Great. So let's talk about your sort of the pace of product innovation, which has been accelerating here. So maybe just talk about how sort of that underpins the company's sort of value proposition and brand?

Yes. So Lovesac has done very well for a very long time. I think we're on like a 6-year CAGR of 30% growth. And for the last decade, it's been nothing but up. And we're experiencing now kind of flattening out in this particular environment in the home category is unique, but it's kind of well-timed for us. And what I mean by that is Sactionals has become, I think, the best-selling couch in the United States of America, at least the best-selling Sactional, particularly premium Sactional in the United States of America. Most of our competitors that we sell against, whether it be firms like Arhous, Resto, Crate and Barrel, Pottery Barn go down the list that are selling, let's call it, similarly priced solutions have 20 or 30 or 40 lines of furniture in this realm, we have one. And it's dominated now with 7% market share in that particular category because of its unique attributes, okay? So it continues to grow as we continue to layer on the innovation, as we've discussed, but it again, gives us a model to attack other categories. So we've announced 3 new category introductions over the next 3 years, this year included in that. And the first category we're going after, as we announced at our Investor Day, is sofas, which is probably a surprising thing to say from a company that already seems to dominate in sofas, but we don't. We sell almost no arm chairs, sofas or love seats. And the reason for that is that Sactionals, while they can be configured that way, don't make a lot of sense in smaller configurations from a price standpoint because of their kind of being kind of overloaded with features and from just a size and style standpoint, and that's a weakness for Lovesac because it's a big style opportunity for us to go after. So we've invented a product called the EverCouch, which is -- which we'll launch this year, midyear this year. It's a very stylistic solution for sofas's love seats and arm chairs that we think can have similar -- we would hope, obviously, to have similar results to what Sactionals has done in large-format Sactionals. And it will have many, many years of proliferation and growth as it is also Designed for Life, not meant to be added to and grown physically, but meant to be able to be changed stylistically, shape shift, obviously, covers, washable, all the things that Sactionals are to an extent. And if you think the obvious place to go is, oh, this must be cannibalistic for Sactionals. Again, we sell almost no Sactionals in these small formats today. So you could think of Sactionals like a luxury SUV. And we've built for a decade disciplined, the best luxury -- best-selling luxury SUV on the market, and that's all we sell. Well, isn't it neat that we can finally launch a luxury sedan and meet a whole new customer where that opportunity exists. And so we're very excited about that. It rides on all of the goodwill we built through our $0.5 billion investment in advertising and marketing, traditional media, digital media for the last decade because we're a brand kind of known for couches that ironically doesn't sell a lot of couches. So it's right down the middle for us. We can't believe we have this opportunity at this kind of stage in our development. Meanwhile, we've been cooking for years in our product development lab, other designed for life solutions in other realms of your home that we believe have bigger potential than Sactionals do and Sactionals is not small. And so we're really excited about getting further -- giving further knowledge to those endeavors. Down the road, we haven't announced what we're doing exactly. But over the next 2 years beyond, 2 new product platforms in 2 new realms of the home is what's coming from Lovesac.

Yes. That makes sense. Shawn, you sort of touched on this a little bit, but over the past couple of quarters, you have released several sort of ancillary add-on sort of launches. Just maybe talk about how sort of these product launches are impacting your repeat orders and AOV and sort of how critical are the sort of smaller innovation to help you grow?

Yes, it will never end. Like we -- our whole value proposition is about a core product that can be grown and augmented kind of forever. And so with Sactionals, we've proven that with a few dozen product launches over this last decade, the chunkiest of which would have been StealthTech that you can add on to your existing Sactionals you might have bought years ago and the recliner that we just launched a few weeks ago. And so that model is the same model we will use as we attack other realms of the home and whatnot. So these are significant. 40% of our business is repeat. But bear in mind, we only sell, at the moment, these premium Sactionals and giant beam bags. And so to have that much of our business be driven by repeat is pretty remarkable. That's on a transaction basis, not a dollar basis. And we're seeing that the biggest driver of our business today is not our TV ads, it's not our digital ads, even though we're spending upwards of 12% on marketing overall, which is significant, our biggest driver of this brand today is word of mouth. It's taken us a long time to build into that, but that's a fact, and we know this through our research. So all of that goodwill underpins both our new product launches on the platforms that we have, which will not cease as well as these new platforms that we're just getting into starting this year with the EverCouch.

Just one other point on that. So Shawn mentioned 40% of transactions being repeat, but it's in the teens in terms of percentage of revenue. So over the course of the last 18 months, we've been experimenting with and building the infrastructure to support an intentional move to drive repeat in our business. And you as customers or as investors would have seen this start to play out earlier this year, we launched a new product on the Sac platform called the PillowSac Accent Chair Frame. What was really interesting about this was people who bought Pillowsacs from us 15, 20 years ago, they now have a new way to experience their Pillowsac in their house. And it was sort of that, let's go learn across our entire fleet of showrooms, how to sell this product to existing folks. We then followed it up with the AnyTable, which is our first entry into case goods. That launched a couple of months after Pillowsac Accent Chair. There's another effort to learn how to drive repeat effectively to our existing customers. And now we have Recliner, which is the biggest and chunkiest and meatiest of those new exciting products on our platforms, on the Sactionals platform we're getting even better at selling repeat.