Release Date: April 11, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- The Lovesac Co (LOVE, Financial) crossed $700 million in revenue for the fiscal year, reflecting high single-digit growth and tripled revenues from four years ago.
- Despite industry headwinds, The Lovesac Co (LOVE) delivered material gross profit dollar expansion, with gross margins up into the high 50s.
- The Lovesac Co (LOVE) ended the year with $87 million in cash and zero borrowings on its credit facility, indicating a very healthy balance sheet.
- The Lovesac Co (LOVE) saw solid fourth-quarter performance with year-over-year growth in revenues, gross profits, and net income.
- The Lovesac Co (LOVE) continues to take market share every year and has a large addressable market of over $46 billion.
Negative Points
- Net income was down versus last year on a reported basis, excluding non-recurring expenses related to the restatement previously discussed.
- The Lovesac Co (LOVE) fell just shy of its guidance for net sales due to a mid-quarter low.
- The category The Lovesac Co (LOVE) operates in was down mid-teens for the year and approximately flat over the past four years.
- For fiscal 2025, The Lovesac Co (LOVE) is estimating another year of category declines, including a full-year decline of approximately 10%.
- The Lovesac Co (LOVE) is basing its outlook on a conservative macro backdrop, estimating a challenging environment ahead.
Q & A Highlights
Q: Can you provide more color on the sales trajectory and the reasons for the observed sales volatility, particularly the strength in January, weakness in February, and restrengthening in March?
A: Mary Fox, President and Chief Operating Officer, explained that the company's guidance for the year assumes the category will remain very tough. In January, Lovesac increased promotions, which led to strong performance. In February, competitors offered aggressive deals, leading to a decrease in Lovesac's sales velocity. The company then returned to 30% off promotions in March, which resulted in a strong rebound. The guidance for Q1 reflects these trends, and the company is confident in its ability to continue gaining significant market share.
Q: How should we think about Lovesac's ability to outperform the vertical, especially looking towards Q1 with expected revenue declines?
A: CEO Shawn Nelson highlighted Lovesac's brand strength, built over a decade, as a key differentiator from competitors. This brand equity is expected to carry the company through tough times and support continued market share gains. President Mary Fox added that the company's focus on innovation, marketing, and touchpoint openings, along with conservative planning, positions Lovesac for success despite the challenging category.
Q: Can you give us more color on your trade-in and resale initiative and the logistics investments needed to enable this initiative?
A: President Mary Fox described the trade-in and resale initiative as a foundational build that is currently in the early stages. The company is working with external partners and developing technology to manage inventory for resale and trade-in. Lovesac sees high demand for its products on the secondary market and is creating a brand experience that leverages its designed-for-life product platform. More details on the model and profitability will be shared later in the year.
Q: Could you unpack the quarter-to-date trends and provide more details on the promotional tactics being used?
A: CFO Keith Siegner mentioned that the company is not providing exact specifics on February and March but acknowledged that some of the sales volatility was company-specific due to promotional and marketing dislocations. President Mary Fox elaborated on the promotional tactics, explaining that Lovesac is testing and learning from various promotional campaigns and adjusting them to drive customer conversion.
Q: What's factored into the gross margin guide for the first quarter, and what are the planned investments for SG&A?
A: CFO Keith Siegner explained that the gross margin story is consistent with the last six months, with potential benefits from changes in relationships for ocean-freight and container drayage, as well as evaluating alternative options for last-mile carrier projects. The SG&A investments are focused on long-term value creation drivers, particularly in product innovation.
Q: Can you provide a cadence of profitability by quarter for the rest of the year?
A: CFO Keith Siegner indicated that the most difficult top line picture of the year is expected to be Q1, which is historically the company's most difficult quarter. The bulk of the profits are still expected to come in Q4, and the seasonal trends, coupled with a slightly better macro backdrop for the year in the back half, should result in a cadence similar to historical patterns.
Q: How does the full-year outlook consider the potential for fewer rate cuts and the likelihood of a soft landing?
A: CFO Keith Siegner stated that Lovesac is taking a conservative approach to its outlook, not relying on any specific macroeconomic outcomes. The company is prepared to manage expenses conservatively while being ready to capitalize on any positive macroeconomic changes, such as a soft landing or increased housing turnover, which could drive more home furnishing demand.
Q: Is the inventory management a one-off or a permanent change?
A: President Mary Fox confirmed that the inventory management improvements are a result of past investments in the supply chain and will continue to drive efficiencies. The company is well-positioned to adjust inventory levels as demand changes.
Q: How should we think about the relative profitability of services revenue compared to the high gross margin on goods?
A: President Mary Fox mentioned that it is still early days for the services revenue model, and more color will be provided later in the year as the company develops these capabilities.
