The Lovesac Company (LOVE) Earnings Call Transcript & Summary

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

Hello, everyone, and thanks for being here today. To kick things off, I'll give you a big-picture look at how we performed in the fourth quarter and across all of fiscal 2026, then walk you through where things stand with our Design for Life product platforms and what our strategic priorities look like for the coming year, after which I'll hand things over to Mary Fox, our President. Mary is going to cover our tailored customer acquisition engines along with the key growth enablers. Then Keith Siegner, our CFO, will take you through the financial results and give you specifics on what we expect in fiscal 2027. Ahead of getting into the financials, I want to call attention to some bigger strategic victories from fiscal 2026 that could otherwise slip past everyone. Those victories are the foundation for our shift from a product-led business into a lifestyle brand spanning multiple platforms and multiple rooms — one that we believe can quickly become the home brand Americans love most and, eventually, the country's most beloved brand overall. That's the target we've set. Every strategy we build reflects that ambition. These victories factor in the economy as it stands and the competitive conditions of a period like this, tariffs among them, along with a certain reordering of priorities so that we maximize the opportunity to deliver value to stakeholders across the long term. To start, we strengthened the strong position we already hold in the living room, focusing on capitalizing on the considerable brand equity we've developed over what now amounts to 27 years. We rolled out a new seating platform called Snugg, and over the next several months it will expand into a complete entry-level sectional platform with additional accessories, including the swivel armchair we showed at ICR. We redesigned our Sactionals platform and accelerated our timeline for bringing manufacturing of the most essential components onshore, beginning this summer. Mary will share further details on that exciting initiative afterward. We also built a brand-new high-end sectional-sofa platform and put it through consumer testing; our plan is to bring it to market before this year is over. That addition should make Lovesac's living room lineup more complete, opening up additional choices so that more customers can find the style and functionality they prefer — and it's all done the distinctive Lovesac way. Next, we've laid the groundwork for a full Design for Life product suite aimed at a completely different room in the home, with a launch targeted for calendar 2027. That's correct — an entire suite of products, and it's a category-defining debut that we plan to back with a major splash during the opening half of next year. Also, we bolstered the groups in charge, especially across marketing, e-commerce, and technology, and we rolled out a soft version of key services, among them better delivery choices that our shoppers asked us to provide. These growth drivers are still at an early stage, yet the payoff is already visible in our Q4 numbers, for example the double-digit rise in our Internet channel. That leads nicely into the next topic; so let's walk through the details for Q4 and for all of fiscal year 2026. Economic unpredictability, heavy promotional activity, and shifting tariffs put our customers to the test and pushed our teams hard during fiscal 2026. Even so, we managed to adjust well, picking up share in the market, generating comparable sales growth across channels, turning a profit for the entire year, producing positive free cash flow, and finishing with a record cash balance at year-end and no debt. In the fourth quarter, net sales rose almost 3%, with comparable net sales across channels positive and contributions from new showrooms beating the category, which was down 3.3%. What's really encouraging is that Internet sales climbed 12.3% during the fourth quarter, which demonstrates the considerable upside available from the improvements the new leadership team has put in place over the past 6 months. Pressure on gross margins from tariffs and category promotions matched what we had most recently anticipated, and so did net income, which declined a bit versus the prior year as a consequence; across the full year, net sales were up 2.4%, with comparable net sales across channels positive and contributions from new showrooms beating the category, which was down 3.4%. SG&A and marketing leverage, along with remarkable work by our teams to offset tariff expenses, delivered a significant favorable effect on operating profits. Yet taken together, gross margin pressure stemming from tariffs and category promotions resulted in net income that was lower than the prior year. Last, our balance sheet is still solid, with a record net cash balance at the close of the year and inventory down nearer to optimal levels, just as we pledged throughout the year. Consequently, we began fiscal 2027 from a position of strength, with considerable flexibility to boost growth or improve returns on capital. Let me take a few more minutes to recap the major milestones of fiscal 2026 concerning our brand evolution analysis, the clarity it gave us on go-forward product hierarchies, and the speeding up of our Made in America initiative. To begin, the objective was clear from the start. Lovesac would shift away from being a company centered on products and grow into a genuine lifestyle brand. To get there, we needed to refine and focus where we stand through a brand evolution refresh. That work wrapped up halfway through fiscal 2026 and gave us a solid, reliable foundation for growing Lovesac into a multi-faceted home brand, backed by a product hierarchy and merchandising approach that's organized and prioritized. It clarified what would allow us to confidently extend the brand further, while also going deeper in categories where we're already strong, so we could compete more aggressively for market share. It also forced us to rethink everything from how products are named to some of the new products themselves, as well as the channels where certain new and even existing products can and should be sold. Following that, we took what we learned from the brand effort and used that framework to make our product priorities sharper and more strategic. The fastest, most effective path toward profitable growth required striking a balance between existing offerings and new ones — capitalizing on the equity we've built, reinforcing our position as a leader in sectional sofas and the living room, and working to gain even more share in those categories. Doing so would strengthen our brand equity and put Lovesac in an even stronger position to compete in new rooms, which represent the more transformative growth opportunities ahead. The key takeaway is this: adding a massive number of SKUs is not what we're after. Instead, we'll deliberately roll out products and platforms at the smallest number we can manage while still reaching dynamism, strong ROI, and affection for this brand. On top of that, each of these thoughtfully selected products was purposefully engineered so that clear separation exists among the platforms — making them stand apart for customers and beneficial to the brand. Snugg, Sactionals, and the upcoming premium sectional sofa in a different style, arriving later in this year, fit that pattern precisely. The same will hold true for the new room launching on day 1, which draws on the multi-platform expertise we've now built. Alongside our brand efforts, we sped up the Made in America push. Though it had been a Lovesac objective for a long while, tariff shifts — which are still in flux — made it all the more pressing. Lovesac holds a distinctive edge: large quantities of a narrow set of SKUs. Concentrating on uniformity like this, and the resulting big volumes, opens the door to dramatic automation — meaning for us manufacturing at home that's superior and cheaper.

This effort kicks off with Sactionals seat inserts during this summer. We didn't just fully rework those to make them better suited for automation — we also brought in entirely new features and benefits, all confirmed through multiple rounds of consumer research. On top of that, we got the chance to renew our patent and IP protection portfolio. As time goes on, we'll bring that same approach to an increasing share of what we sell. Naturally, these new Made in America Sactionals will work in reverse compatible fashion and function seamlessly alongside every Sactionals unit ever purchased. Beyond that, we anticipate that Made in America items will assist in lessening cost swings, cut the danger of overseas shipping interruptions and shrink the weeks of inventory needed to deliver the rapid shipping we're famous for. Last, with our new CMO guiding things, we're assembling a contemporary marketing operation. By speeding up our digital transformation and broadening our data and analytics capabilities, our goal is to lift consideration for the Lovesac brand, bring down customer acquisition costs, boost demand generation and fuel repeat purchases along with customer LTV, lifetime value. You witnessed Phase 1 of that during the fourth quarter, with far more arriving across the quarters ahead. Ideally, it's evident how much foundational effort got finished in fiscal 2026, which we feel positions us quite strongly going into fiscal 2027. Following 4 tough years of category declines, we genuinely wish that the year ahead brings category demand back to growth, yet we don't build strategy and plans around wishing. And everyone knows about the geopolitical and economic unpredictability in our world. Lately, category declines have been moderating, although they're still declines. So we're planning around the premise that the category will decline yet again in fiscal 2027 by roughly low single digits. Keith will go through the details afterward, but we think we possess the required components to expand no matter what the category does in the near term, while keeping clarity regarding long-term thinking and value creation. We're broadening our addressable markets across existing and new rooms by drawing on our core brand equities in quality and comfort, by seizing on our installed base of super fans to push LTV through repeat business, and all of that happens while bringing ever more households into our family via more effective marketing strategies and a lower cost of acquiring customers. Our pledge isn't only to grow the top line no matter the macro picture, which is accurate, but for revenue growth to produce improved flow-through into bottom line growth and end up delivering higher margins. We anticipate that Lovesac will also most certainly gain from an eventual category rebound, and we'll happily accept that icing on the cake whenever it shows up. Lovesac came into fiscal 2027 from a strong position, marked by a distinct strategic road map and a world-class team concentrated on producing profitable growth and enormous long-term value creation for all stakeholders. To wrap up, I want to express genuine gratitude to our team, our #LovesacFamily, for the dedication, commitment and creativity they keep showing as we strive toward becoming America's most loved home brand. Now, I'll turn things over to Mary.

Thanks, Shawn. Picking up from Shawn's rundown of our Design for Life platforms, I'll turn now to the engines that bring customers in, plus the growth enablers driving our momentum. Before I get into details, let me step back and restate how we view the distinctive overlap between our product platforms and our acquisition engines; we intentionally say platforms, not products. In the industry where Lovesac operates, shoppers pick a product — some based on looks, some on comfort, perhaps simply on measurements — and then they're basically tied to it for 7 to 10 years. With our platform approach, things work quite differently, since nothing in a Lovesac purchase prevents a customer from continuing to iterate on what the platform makes possible. 85% of our customers go on to evolve, add to, or complement the Sactional they first bought through additional purchases. Our research tells us that 7 in 10 customers reconfigure their Sactionals, while over 4 in 10 add seats or swap fabrics. That's a fundamentally distinct paradigm — nearer to Apple than to conventional furniture — in that the platform gains value the longer it exists and the further it extends. To illustrate, nearly 50% of Lovesac purchases involve repeat buyers, because they recognize the inherent value and the ability to continually customize and adapt their Sactional as circumstances and requirements change. This is central to what we call our customer acquisition engine superpower. Essentially, it's a compounding blend of brand and performance marketing, omnichannel retail footprint, and investments in customer relationships, generating cost-effective awareness, conversion of customers, and enduring brand loyalty. This approach accounts for why we completely recoup our customer acquisition cost upon the initial purchase, and why our lifetime value, as measured by gross profit, hits 1.7 times the first purchase by year five. The amount of personalization people invest in their Lovesac grows the longer they own one. That's also the reason our retail locations return their cash investment within 12 months, despite having close to 300 stores today. As we move into additional product categories and additional rooms within the house, this platform model component powering our customer acquisition engine superpower will only accelerate, and we anticipate that will drive lifetime value up even further — all of which makes us incredibly optimistic regarding what lies ahead for this brand and the economic potential it holds. Our Reclining Seat may be the clearest proof of this, having achieved tremendous success and surpassed even the lofty expectations we had set. During fiscal '26, a Reclining Seat was part of one in three new Sactional configurations purchased. The clear result was an influx of first-time buyers, plus notably robust repeat purchasing; in fact, roughly 40% of those sales came from repeat customers who were already part of the Sactionals ecosystem. What this shows is that genuinely meaningful innovation drives a striking ratio between lifetime value and customer acquisition cost, together with healthy gross profit on the initial order and a lifetime value that continues to grow because of our established community of brand fans, which expands every year. To dig a bit deeper into what fuels our customer acquisition, let's start with brand and performance marketing. Continuing the strategic shift that started in quarter 3, quarter 4 represented a decisive turning point in updating how we approach marketing — not simply through different spending, but through different ways of operating as we aim to succeed in AI-driven modern discovery. As we mentioned during December's earnings, during quarter 4 we shifted our media mix toward a digital and social-first strategy, making a dramatic move away from a model historically led by channels, one that involved substantial TV spending. The takeaway here is that we're moving toward a more unified approach across paid, owned and earned channels, which raises our overall return on ad spend and strengthens the economic model. Through this approach, we were able to build brand interest and awareness while simultaneously keeping lower funnel tactics in balance to improve efficacy, particularly during major promotional tentpoles. As a result, Black Friday saw substantial year-over-year growth, and Cyber Monday more than doubled — the best Cyber Monday we've ever had. We rolled out our Here for It All holiday campaign, which brought a more emotive, social-first creative expression. Spread the Love activations, backed by strong influencer and earned media activity, worked alongside it, driving very strong brand engagement overall. One brand highlight we'd point to is the launch of our Couchmas push after the holidays, which drove earned media coverage, cultural buzz and extra store visits during what's normally a slower stretch. What matters is that we weren't just chasing eyeballs. The goal was to tie our brand narrative to the Design for Life product platform, turning those impressions into purchases across every channel. And that's what happened. Even as we continue working to shore up weaker demand in the more value-focused Sactionals end of the business, where tickets come in under $6,000, we simultaneously saw higher average order value shoppers holding strong and growing, lifted by launches like the Reclining Seat, Lovesoft and StealthTech. That gave us greater conviction in the brand and in the fundamental worth of our product platforms. Next, let's talk about our digital setups and the way we present Lovesac on the internet. We started revamping our digital approach back in quarter 3, bringing in new leaders and getting our internal teams better aligned, and we're already seeing encouraging early evidence that this is boosting Lovesac's online expansion. During quarter 4, we upgraded our underlying platform so customers could navigate more easily, enjoy a smoother, more intuitive experience, and benefit from AI discoverability. That work showed up plainly in our numbers, since web demand for quarter 4 climbed by double digits compared with the prior year, fueled by more traffic and better productivity. Throughout major promotional windows, demand grew faster than traffic, which showed we were converting more efficiently. Black Friday produced substantial growth versus the prior year, while Cyber Monday was more than twice as strong. On top of that, satisfaction among our web customers hit an all-time high, and that held true even when traffic was at its busiest — which confirms that the money we've put into digital is making the experience better and helping us handle growing demand. Taking everything into account, we're well positioned to carry this momentum forward and continue advancing our digital transformation efforts, all with the goal of producing stronger engagement and conversion on our site in the coming year. What really powers our customer acquisition efforts is the ability to expand specific platforms inside the appropriate channels; to put it differently, we start out targeting the potential for market share, and then we adjust components of those acquisition engines so we can seize that share as efficiently as possible. Our fiscal '26 Snugg launch demonstrates this potential and shows off the strength of our digital-first platform. Snugg's simpler value proposition and tighter assortment struck a chord in the digital channel, and over 50% of its year 1 sales originated online. Given how well Snugg did on the web, we're confident that digital-first platforms can perform alongside our more intricate platforms, which lean toward showroom demonstrations. Third comes our showroom experience — the physical brand amplifiers for our Design for Life products and the hidden advantage of our omnichannel model; during fiscal '26, our fleet hit 278 stores, and I'm happy to report that the fiscal '26 cohort is on track to achieve 1-year cash paybacks with very little cannibalization. During quarter 4, we honed in on the Lovesac product experience, a new selling framework, and linked associate rewards more closely to performance. Thanks to our focused selling framework, teams can now steer customers more effectively through the modularity, customization and longevity of what we offer.

Conversion is getting better, and it’s also helping us support larger average order values. At the same time, during quarter 4, we introduced a stronger field incentive program, with goals tied entirely—100%—to how each individual showroom performs on sales, and with bigger compensation upside for locations that beat their sales target. Thanks to this program, associate productivity rose by a mid-teens percentage compared with a year ago. Given how well this enhancement worked, we’re taking the program into fiscal ’27. Last, alongside our digital and showroom acquisition engines, we have our partnership strategy, with Costco as the clearest illustration. Our online and pop-up-shop approach lets us reach Costco’s more than 80 million members, while we retain 100% ownership of the customer data and the relationship. This year we broadened our assortment with Costco, introducing additional fabrics, Reclining Seats, StealthTech, and the PillowSac Accent Chair, among other items; we also sharpened pop-up-shop placement so it targets important Lovesac demographics and segmentations, drawing on our distinctive capacity to sell big premium products within only 100 square feet. Together, these 4 components of our customer acquisition engine produce a customer experience without equal, one that fuels brand love and makes long-term customer relationships possible. In fiscal ’26, we strengthened this even more through customer-facing services; we have always gotten customer orders to them quickly and at no cost within a matter of days. Yet during fiscal ’26, we added room of choice delivery and ran a pilot of full white glove delivery and assembly, each available for a fair fee. Everything has performed well, and we intend to introduce both across the country in fiscal ’27. Fiscal ’26 was also when we launched Loved by Lovesac, our resale platform. By the end of the year, 29 states were taking part actively. Almost 70% of Loved by Lovesac customers are newcomers to our ecosystem, which confirms that this is a strong acquisition engine and a builder of lifetime value. Even more encouraging, a significant and rising share of those customers later return to purchase more, both from resale inventory and from new inventory. In addition, our data indicates that these programs deepen customers’ appreciation for our dedication to Design for Life and circular operations principles, and they strengthen the long-term value of what those customers have invested. Turning briefly to our growth enablers, our supply chain is a competitive edge, a genuine strength, and essential to our ability to keep profitable growth going. Across fiscal ’26, we reworked our sourcing model and supply chain so tariff disruption would have less impact. We’re happy to report that we finished fiscal ’26 with 0 production originating in China, which is remarkable progress considering China accounted for close to 50% only a few years back. Still, that’s just the first step; our diversification work is ultimately meant to move production nearer to the customer, and as Shawn mentioned, we are speeding up our Made in America initiative and remain on schedule to start domestic production of Sactionals seat inserts this summer. On top of the advantages Shawn described earlier, I’m thrilled to report that, given our progress so far, we think we can achieve this while keeping gross margins neutral relative to current levels, excluding tariffs. The people within our organization have truly surpassed expectations over the past 12 months, and we appreciate their remarkable dedication. Before handing things off to Keith, I'd like to take a moment to touch on our fifth annual ESG report, which came out in December. Whether or not you're aware, our company's mission — which sits at the heart of our Design for Life principles and operational model — is to inspire humankind to buy better so you can buy less. That refreshed report built upon this idea and demonstrated ongoing advancement toward our objectives, among them our pledge of zero waste and zero emissions by 2040. We take pride in having worked alongside our U.S. Sac manufacturer to scale up our first production line achieving zero landfill and net zero emissions. We also take pride in being the biggest repurposer of recycled plastic bottles within the home category, along with much else. We understand that the steps we take now will mold the world of tomorrow, and we are setting the example. United, we can build a future that is brighter, greener and more comfortable for generations ahead. And now, Keith, the floor is yours.

Thanks, Mary. I'll jump right into a quick review of our numbers and our outlook. For the full year, revenue reached $697.1 million, up from the $680.6 million we reported the prior year, fueled by new showroom locations and gains in omnichannel comparable net sales. Gross margin came in at 56.4%, which is a solid result, especially considering the effect of tariffs. Net income was $4.1 million, lower than FY 2025 because of increased tariff, freight, and operating expenses, yet it still supported positive free cash flow for the year along with a strong cash position, which I'll discuss in more detail in a moment. Turning now to the fourth quarter. Unless I note otherwise, every fourth-quarter performance figure I mention relates to fiscal '26. For the quarter, net sales increased by $6.6 million, which works out to 2.7%, reaching $248 million compared with the same period a year earlier, and that came as omnichannel comparable net sales improved 0.6%. Our showroom business posted $159.8 million in net sales for the quarter, up $5.3 million, or 3.5%, from the year-ago period, helped by having 21 more showrooms open than a year earlier on a net basis. Internet net sales for the quarter totaled $79.2 million, an increase of $8.7 million, or 12.3%, compared with the prior-year period. In Q4, other net sales—covering pop-up shops, shop-in-shops, open-box transactions, and the Loved by Lovesac Program—dropped $7.5 million, a 45.4% decrease, landing at $9.0 million compared with the same period last year. That downturn was primarily caused by shuttering the Best Buy shop-in-shop sites after the company ended its partnership with Best Buy. Looking at Q4 by product category, Sactionals net sales increased 1%, Sacs net sales declined 18.2%, and other net sales—a group that includes the new Snugg platform, decorative pillows, blankets, and accessories—grew 191.9% versus the prior year. In the fourth quarter, gross margin declined 230 basis points, landing at 58.1% of net sales, compared with 60.4% during the same period a year earlier. The main pressures came from a 300 basis point increase in inbound transportation costs and tariffs, along with a 90 basis point rise in outbound transportation and warehousing costs. Partially offsetting those pressures was a 160 basis point improvement in product margin, which reflects price increases, cost reduction initiatives, and concessions from our vendors in response to changes in the tariff environment, partly offset by higher promotional discounting. SG&A expense as a percent of net sales was roughly unchanged, at 28.1% in the fourth quarter versus 28.0% in the prior year period. SG&A dollars rose by $2.2 million, primarily driven by a $7.9 million jump in payroll from greater incentive compensation, $0.8 million for new product innovation costs, and $2.0 million in other overhead costs. These were partially offset by reductions of $4.0 million in professional fees, $3.9 million in equity-based compensation, and $0.6 million in credit card fees. Rent increased by $0.1 million, reflecting a $0.8 million rise in rent expense from the net addition of 21 showrooms, partly offset by a $0.7 million decline in percentage rent. In the fourth quarter, advertising and marketing expenses decreased $1.3 million, or 4.7%, to $25.5 million compared to the same period last year. During Q4, the portion of net sales consumed by advertising and marketing costs was 10.3%, whereas during the same stretch a year earlier it was 11.1%. Operating income reached $44.9 million this quarter, down from $47.6 million in last year's Q4, and the reasons we already walked through explain that gap. Before we get into net income, net income per diluted share and adjusted EBITDA, we'd ask you to check the terminology and the reconciliation showing how each adjusted metric lines up with its closest GAAP counterpart — that's all in the earnings release we put out this morning. Net income landed at $32.1 million, equal to $2.19 per diluted share, versus $35.3 million, or $2.13 per diluted share, during the equivalent period one year ago. In Q4, our income tax provision came to $13.5 million, versus $13.0 million during the same period a year earlier. For the fourth quarter, the effective tax rate stood at 29.6%, while for the fiscal year it was 39.0%. Those year-over-year increases stemmed from a deferred tax asset shortfall tied to equity compensation that had been expensed at higher levels in earlier periods, made worse by weak pretax income. We don't expect these issues to happen again, and for future years we think using a full-year tax rate nearer to 30% in your models makes sense. On a fully diluted basis, weighted average shares outstanding for the entire year were roughly 14.7 million. Our diluted share calculation now follows GAAP's treasury stock method more closely. Under the old approach, we had been counting some RSUs and PSUs in the denominator when we shouldn't have, and that inflated our diluted share count. For the quarter, adjusted EBITDA came in at $49.6 million, versus $53.9 million a year earlier. Now on to the balance sheet. We closed the fourth quarter in a strong financial position, giving Lovesac plenty of room to put capital toward growth and build shareholder value over the long term. Cash and cash equivalents stood at $101.9 million, and we still have $36 million in committed availability, with nothing drawn on our amended credit facility. To start, throughout this entire year we've been saying that our goal was to bring down the amount of surplus stock sitting on the balance sheet when fiscal '26 closed, compared with where it stood a year earlier. We're happy to report that's exactly what happened — a 14% decline from the prior year. Regarding our inventory, we're confident in how good it is as well as how much of it we hold, and in our capacity to keep leading the industry on in-stock positions and delivery times. Looking ahead to fiscal '27, we expect the inventory balance to rise modestly as we account for expansion in products and platforms. Next, I want to take a moment to talk about how we allocate excess capital. Because of substantial unpredictability and the broader economic environment tied to tariffs and what consumers are spending, we chose not to buy back any shares of our common stock in Q4. Across all of fiscal '26, we bought back $6.0 million worth of our common stock that was outstanding, leaving roughly $14.1 million still available under the share repurchase authorization we had previously. We're happy to share that the Board of Directors at Lovesac recently gave the go-ahead for buying back as much as $40 million of outstanding common stock, on top of what was previously authorized, which raises the total authorization on hand to about $54.1 million. When it comes to how we allocate capital, nothing has changed. Our plan is to stay opportunistic, keeping our focus on long-term value for stakeholders and improving returns on capital. For additional information about how we performed financially in the fourth quarter, please look at our earnings press release; so let's turn now to our outlook. As Shawn noted, we aren't building in any assumption that the macro picture gets better, and so for planning purposes we've assumed the category keeps following its recent pattern of low single-digit declines for the whole fiscal year; on top of that, we face uncertainty around many costs stemming from various geopolitical matters; in the outlook we've provided, we've incorporated our most current understanding and expectation regarding tariffs, along with some pressure on shipping and certain cost of goods sold coming from the recent increase in oil prices.

Conversely, we have not baked in any upside from a possible refund of IEEPA tariffs already paid. All such matters are under close watch, and updates will come your way at the earliest practical moment. Turning to the full year in particular, our net sales projection sits at $700 million to $750 million. Adjusted EBITDA is anticipated to land between $33 million and $44 million. Within that, gross margins come in at 56% to 57%, advertising and marketing run roughly 12% as a percent of net sales, and SG&A runs roughly 40% to 41% as a percent of net sales; net income is projected in the $5 million to $14 million band. Diluted income per common share is put at $0.34 to $0.95, alongside an estimated 14.7 million diluted weighted average shares outstanding; roughly 8 net new showrooms, give or take a couple, are slated to open, with capital expenditures anticipated at about $20 million. As for the first quarter, our net sales estimate is $133 million to $139 million; an adjusted EBITDA loss of $12 million to $16 million is what we foresee; embedded in that are gross margins of 51.5% to 52.5%, advertising and marketing at roughly 13% as a percent of net sales, and SG&A at 51% to 53% as a percent of net sales. A net loss of $14 million to $18 million is our projection. Diluted loss per common share is forecast at $0.95 to $1.22, with 14.7 million shares outstanding. To wrap up, prudence and efficiency are being balanced against our conviction that keeping an eye on the big picture matters most; that picture being the enormous long-term chance for outsized value creation benefiting every Lovesac stakeholder. The Lovesac brand is being built, and we are funding fresh innovation across style, function and category to underpin a robust multiyear secular growth outlook carrying macro upside exposure, a welcome accelerator whenever it at last arrives; with that, I hand things back to you, operator.

Congratulations on the continued momentum here. So my first question, and it's about the sales guidance for this fiscal year that you gave us today. Obviously, you're making it plain that no macro tailwind is expected. But when you consider that range, from the low end all the way to the high end, which main factors decide where sales end up landing inside it?

Thanks for asking, Brian, and it's nice to hear from you. Right, as you pointed out, no improvement in the macro environment is something we see, and none has been baked in. What we're really concentrating on, then, is the stuff within our control. Obviously, the first area we examine is the clear visibility we have on our product innovation launches — the ones still to annualize, plus the new ones arriving at their respective times. That piece, we're very clear about. We're also very clear on our showroom expansion and, as I mentioned earlier, the next phase of the marketing and e-commerce transformation. Third comes our delivery services expansion, and the incremental revenue we expect is, in a sense, the first year of rolling that out. Some testing has been done on that, but variability will obviously exist. We know conversion has been a highly friction-filled point for customers who wanted assembly capabilities provided by us. The great news, then, is that rollout is going to happen. Variability does exist around both the timing and the take-up of that. Similar competitive environment is another thing we assume. So it really comes down to that range of that very new revenue driver, which will shift the difference between what we anticipate in the range. And our intent, obviously, is always to keep gaining strong market share, just as we demonstrated last year, and to accelerate it. So we're looking forward to the year. The team is actually pumped about all the opportunities ahead of us.

Mary, that's really useful. Then my next question, I suppose, concerns gross margin. Once more, there are many shifting components; last quarter we began discussing reshoring, so to speak, moving production back to the United States. So what I'm asking is, as we examine gross margins at present and take into account the continuing tariff effects, how ought we to consider the path ahead across any timeframe? Will the reshoring initiative, will those — will that end up benefiting gross margin? In other words, do you anticipate offsetting a portion of these tariff expenses through other means down the road?

Thanks, Brian. That's a solid question. I'll begin on this one. Regarding gross margins, a few points deserve attention when it comes to the onshoring program, and the first is that scaling that production up and moving it through our inventory will require time from us. Consequently, with something like tariffs, it matters to understand that at the moment we pay those tariffs, what happens is we capitalize them and tie them to the inventory, which lands on our balance sheet, and afterward, when we sell through, it moves into our P&L. So we're genuinely enthusiastic about this potential, and I'll address that longer-term opportunity shortly; however, when you consider how this year unfolds, once we have that inventory truly moving through the P&L as production increases, and so on and so forth, we won't manage to capture much of that gain during this year. So, to remain on this year briefly, what we're considering from a tariff standpoint is that with all the tariffs currently in effect, our exposure to China-specific tariffs has ended, which pleases us, yet Section 122 and others remain. What we've incorporated for the time being is that once the 122 tariffs expire, we've assumed something different will take their place and come close to those rates for the second half of the year. So — and we still face an annualization of the effect since it didn't cover the whole of last year, correct? So taking all those elements together, plus a bit of leeway regarding possible swings in shipping rates — we've incorporated some effect from that too. So I believe we're fairly at ease right now that there is some room — that some room exists for favorability, though risk is also present. We've sort of constructed — we've constructed several of these scenarios already. Then, once fiscal '27 is behind us and fiscal '28 begins, that's when our enthusiasm grows regarding possible improvements to gross margins stemming from a domestic manufacturing footprint, plus the freedom it provides in deciding how to approach overarching pricing, discount strategies, and arriving at the right bottom line AOV for our customers, which helps us capture the greatest market share gains alongside the greatest profitability. Another item we'll be entering into at that point, with further details shared at that point, is the expansion into the new room. Because of this, we'll enjoy a great deal of flexibility. Our cost structure will also see much less volatility, since we'll be less exposed to uncertainty tied to tariffs, to uncertainty tied to shipping rates, and to fewer weeks of stock being needed as more and more pieces shift into the domestic manufacturing realm. So we'll share much more detail on that as we progress further through this year and begin moving into next year. Still, yes, it excites us to be positioned to optimize as we enter '28.

I have one question, then a follow-up. Could you discuss how gross margin and contribution margin compare for the e-commerce side, specifically Love by Lovesac, against what we see from new merchandise sales?

Sure. Tom, I appreciate you asking. As you're aware, on our end, Loved by Lovesac only kicked off its launch during the prior year, and we've been expanding on the resale front. At this point, I believe we're in 29 states, and Arizona will actually come online next week. So turning to what you asked about — looking at it through a gross margin lens, versus the way we handled open-box inventory previously, there's meaningful points of upside available to us because we can rotate that inventory back out and move it at a better value rate than what we used to get. There's still plenty to figure out regarding how quickly customers move around things like pricing, which clearly has an impact on gross margin, plus how to scale it; so today it isn't material, though we expect that gross margin gain to show up eventually, which is exciting. Then there's a second element we'll be unlocking, and honestly this is the part that has us most excited, with a pilot beginning this year: trade-in, since we genuinely see tremendous strength when it comes to taking the product back in trade and, clearly, being able to move that product after it's been cleaned and sanitized for a gross margin. Even more critical, though, is that the customer receives a credit and then upgrades, purchasing still more from us. That really captures the strength of our platform; whether someone adds another recliner chair, new covers, or any of the other things Shawn mentioned are coming, just the acquisition cost and consequently the gross margin gain we'll capture by seizing that opportunity is going to be quite substantial; though once again, as we scale this, we'll provide more detail when it grows more material.

Then as a second question, what's the right way for us to frame the relationship between adjusted EBITDA and the conversion into free cash flow?

Got it. When it comes to converting free cash flow, my expectation is somewhat reduced swings compared with what you may have observed across the prior two years. Inventory sits in a very healthy spot for us. The processes we rely on are already well aligned and established as we move through this year. What I said before, I believe, still holds: a modest year-over-year build in inventory, yet I don't see many other forces creating divergence between what we'd call our EBITDA and our free cash flow. On the balance sheet at the close of the quarter, you'll see accrued expenses and accounts payable that are considerably lower than a year ago. So, as a reminder to everyone, that inventory was built during Q4 of last year. The payment for it happened in Q1, correct? Those obligations came due for cash in Q1. This time around, inventory is lower. Accrued expenses and accounts payable are considerably lower. As a result, less cash will go toward settling those obligations during Q1 of this year. Those really are the sole subtleties. All other items ought to be much smaller sources of divergence.