Lovesac Reports Q1 2027 Results: Full Earnings Call Transcript

On Thursday, Lovesac (NASDAQ:LOVE) discussed first-quarter financial results during its earnings call. The full transcript is provided below. This content is powered by Benzinga APIs. For comprehensive financial data and transcripts, visit https://www.benzinga.com/apis/. View the webcast at https://viavid.webcasts.com/starthere.jsp?ei=1752935&tp_key=27608a38b5 Summary Lovesac's net sales decreased slightly by 0.1% to $138.2 million for the first quarter, outperforming a declining furniture category. The company is committed to evolving from a product-driven entity to a multi-platform lifestyle brand, emphasizing long-lasting, adaptable products. Future strategic initiatives include expanding product offerings for the living room and launching new products for another room by fiscal 2028. Operational highlights include the planned start of domestic manufacturing for sactional seats, expected to reduce costs and improve fulfillment speed. Despite a challenging macroeconomic environment, Lovesac maintained a strong balance sheet with $57.0 million in cash and no debt. Management remains optimistic about long-term growth, focusing on customer relationships, marketing improvements, and supply chain resilience. The company is leveraging AI to enhance digital marketing strategies and improve customer engagement. Guidance for fiscal year 2027 includes net sales of $700 to $740 million and adjusted EBITDA between $35 and $46 million. Full Transcript OPERATOR Greetings welcome to Lovesac's first quarter fiscal 2027 earnings conference call. At this time, all participants are in listen only mode. The question and answer session will follow the formal presentation. We ask you to please limit yourself to one question and one follow up. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Colton West with investor relations. Thank you. You may begin. Colton West (Investor Relations) Thank you. Good morning everyone. With me on the call today is Shawn Nelson, Chief Executive Officer, Mary Fox, President and Keith Signer, Chief Financial Officer. Before we get started, I would like to remind you that some of the information discussed will include forward looking statements regarding future events and our future financial performance. These include statements about our future expectations, financial projections and our plans and prospects. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the Company's filings with the SEC, which includes today's press release. You should not rely on our forward looking statements as predictions of future events. All forward looking statements that we make on this call are based on assumptions and beliefs as of today and we undertake no obligation to update them except as required by applicable law. Our discussion today will include non GAAP financial measures, including EBITDA and adjusted EBITDA. These non GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. A reconciliation of the most directly comparable GAAP financial measure to such non GAAP financial measure has been provided as supplemental financial information in our press release. Now I would like to turn the call over to Shawn Nelson, Chief Executive Officer of the Lovesac Company. Shawn Nelson (Chief Executive Officer) Good morning everyone. Thank you for joining us today. I'll start our conversation by sharing a brief review of our strategic roadmap. Then I'll provide a high level summary of our first quarter fiscal 2027 performance and finally I'll discuss exciting updates on our strategic initiative. Mary Fox, our President, will then take you through our customer acquisition engines, operational initiatives and key growth enablers. Finally, Keith Signer, our CFO, will dive deeper into our financial results and provide additional detail on our outlook for fiscal second quarter and the remainder of fiscal 2027. Before getting into the core specifics, I want to begin with the broader strategic landscape as I believe the operating environment we find ourselves in today increasingly favors differentiated brands with disciplined execution, structurally advantaged product platforms and enterprises intentionally focused on building long term customer relationships. That is exactly what LoveSac has spent years architecting and operationalizing as I've shared in the past. We are evolving from a product driven company into a multi platform, multi room lifestyle brand. A brand we believe will become America's most loved home brand and over time one of its most loved brands. That is what we build our strategy and execution agenda around. We are not trying to compete through endless assortments, seasonal replacement cycles or trend driven merchandising. Instead, we are building long duration product platforms designed to evolve with our customers lives over years and decades. Products that are built to last and designed to evolve. Design for Life is not simply a tagline for us, it's an engineering principle. It is a product philosophy and increasingly it is becoming a broader emotional framework for how customers connect with the Lovesac brand itself. Context is important here. The world offers static solutions to dynamic problems, but this doesn't work. Why? It's simple. People's lives evolve, Their homes evolve, their families evolve. That is exactly what our Design for Life ecosystem is built to do. Over the next four quarters you will see us bring this ethos to market. First through the enhancement of our offerings for the living room and second through our planned launch of a portfolio of distinctive and relevant products for a new room of the home in calendar 2027. Our fiscal 2028 importantly, our unique approach to product philosophy is resonating within a category that remains pressured and highly promotional. During the fiscal first quarter once again our teams rose to the challenge, delivering market share growth and with financial results. In line with our guidance, net sales for the quarter decreased approximately 0.2 million or 0.1% versus the prior year period against a furniture category that declined 2.2% and high end furniture which declined by 5% operationally. We also continued see encouraging proof points that the platform model is resonating. We saw significant momentum in our larger configurations showing that the customer is willing to trade up if the value proposition is right. Reclining seat continues to outperform our expectations and attachment rates have remained strong at nearly one out of every three configurations. Getting a recliner Snug, which was still less than a year old, continues to broaden our reach into comfort seating and smaller space living while reinforcing the same principles of comfort, durability, maintainability and flexibility that Lovesac has become known for. 80% of Snug customers are new to Lovesac, proving our thesis that we could expand our customer appeal while minimizing cannibalization. Equally important is that nearly half our Snug sales are through our e commerce channels, showcasing our ability to develop digital first products that can win profitably in those channels. These are not isolated product signals. They are proof points that design for life product platform attachment is real and that our solutions solve real customer pain points in ways that traditional furniture just can't. To that end, we are proud to share that Lovesac moved up two places in Furniture Today's Top 100 Retailers list. We're now the 17th largest furniture retailer in the country, and what's most exciting to me is how that is achieved. With substantial greenfield opportunity ahead of us, our first quarter continued the momentum in building the substantial foundational work around our broader brand evolution strategy. This work helped clarify product hierarchy, merchandising strategy, positioning architecture, customer segmentation, and how it all manifests to the consumer under our here for life marketing evolution, which is rolling out as we speak. At the same time, we are continuing to invest in a modern marketing engine that will turbocharge our brand consideration and reduce our customer acquisition costs, leading to accelerated demand generation and higher customer ltv. Mary will share more about this in a moment. Because ultimately we believe the future of LoveSac is not just about selling more couches. It is about deepening the relationship our customers have with our brand, winning their loyalty and their love as we prove our ability to evolve in the same way their lives do. Simultaneously with this brand evolution work, we've made substantial progress on one of our most important structural initiatives, bringing manufacturing onshore to the US While bringing manufacturing closer to the customer has long been an aspiration for lovesac, the realities of the uncertain tariff landscape, freight volatility, and broader geopolitical uncertainty only reinforced the importance of building a more regionalized, resilient and flexible sourcing model. But it's not economically attractive to simply make the exact same product in the same basic way just in the US and that's where loveseq has a differentiated advantage. Our high volume core SKU architecture enables levels of automation and manufacturing efficiency that are difficult for traditional furniture players to replicate at scale. Even with that foundation, we've redesigned these products from the ground up to optimize automation, improve manufacturability, enhance comfort and functionality, and refresh portions of our intellectual property portfolio, all while maintaining reverse compatibility across every Sactional ever sold. We remain on track to begin domestic manufacturing of Sactional seats this summer. Over time, we expect this initiative to help reduce cost volatility, improve fulfillment speed, reduce dependency on long international freight cycles, and strengthen our ability to deliver the fast customer experiences we are known for. I believe LoveSac enters the remainder of fiscal 2027 from a position of increasing strategic clarity and strength. We know who we are, we know how we're differentiated and we know where the opportunities are. We entered fiscal 2027 having proven three important things. First, the Lovesac brand is vibrant and the love for design for life products is real. Second, that our customer acquisition engine compounds over time as our design for Life platforms expand and third, that the foundational work completed over the last several years from the modernization of our marketing engine to our best in class website and showrooms network to supply chain diversification and onshoring initiatives, give us increasing flexibility to navigate a highly dynamic environment while continuing to build for the long term. The macro will be where the macro will be, so our focus remains on building a brand and business that can continue to gain meaningful market share, expanding categories from the mailbox to the backyard fence, and strengthening long term customer relationships irrespective of short term market conditions. We are pleased to be in such a position of strength, a strong balance sheet with solid cash position and no debt, lower and well positioned inventory, a clear strategic roadmap and a world class team executing it. A lot of the work we're doing here in product and marketing and supply chain will start to culminate towards the end of this year, giving us tremendous confidence in the plan and what it will enable ongoing. And finally, I want to sincerely thank our teams, associates, partners, shareholders and the entire hashtag LoveSacFamily for their continued dedication, creativity, resilience and passion as we continue building what we believe can become the most loved home brand in America. With that, I'll turn the call over to Mary. Mary Fox (President) Thank you Sean. Our first superpower designed for Life product platforms continue to demonstrate their ability to grow more valuable over time as customers maintain them, adapt them and evolve them. That dynamic is what powers our economics and long term value creation. Potential LoveSac turns first time buyers into long term relationships, compounding immediate customer acquisition cost payback with lifetime value expanders through a combination of strong brand unique product and platform innovation and deep customer engagement. And importantly, it is not theoretical launches like reclining seat not only drive customer demand but activate our installed base, reinforcing the flywheel between innovation, new customer acquisition and durable repeat customer revenue growth. As we expand into new platforms and new rooms, we're confident that our platform model and the customer acquisition engines that activate it will position us to further amplify both customer lifetime value and meaningful profitable growth for years to come. Turning to quarter one, we're proud of our teams for navigating the continued uncertainty of the category and macro environment by staying laser focused on our key priorities for fiscal 27 igniting the core and building for scale as we turbocharge our customer acquisition engines to drive profitable growth while preparing to launch into a new room of the home over the next 12 months. While trends have been fairly consistent since the fall, I thought it worth a moment to share some details of what we're seeing within our customer demand. Given record low consumer sentiment, it's not overly surprising that we continue to see some softness in the under 6,000 transactions here. the other end of the spectrum, our premium value enhancers like Love Soft Fill Storage and Reclining Seat have been able to offset that softness and we've experienced mid double digit growth in our over $6,000 transactions for the balance of the year. Our efforts will be concentrated on leaning into this high dollar value transaction growth while improving accessibility and competitiveness in the opening price point options. We'll have more to share on this in coming quarters. Let's now focus on our brand and performance marketing engine. Sean referenced the modernization of our playbook, which is not simply rooted in spending differently, but in operating differently as we build towards winning an AI (Artificial Intelligence) driven modern discovery. Quarter one demonstrated our ability to improve media efficiency and optimize advertising and marketing investment and we are seeing signs that the strategy is working. We're strengthening the brand to both drive sales now and build equity over the long term. Our Here for Life creative evolution is live in market, improving both emotional connection and cultural relevance while bringing new and repeat customers into the funnel and converting them. While other furniture brands seek to sell perfection, lovesac is going to show perfect reality. Real homes, real people, real emotion because real life is what we are here for. Here for Life is a full 360 degree campaign with paid owned site, store and resale running from now through July. We continue to be at the epicenter of the cultural zeitgeist by tapping into important demand moments with strong campaign messaging and creative Our Ditch the Situation Ship campaign activated around the February holiday window spanning both Valentine's Day and President's Day and was based on a simple insight Too many people are settling in life, particularly on their couch. We tapped into the broader cultural conversation around upgrading what no longer serves you and translated it into a compelling home category message and the Results were strong. 1.2 billion earned impressions and paid search up 33% and it's a great example of the marketing engine we're building, one that strengthens the brand while delivering against our sales targets. We drove meaningful efficiency gains while scaling demand for the quarter. We estimate our Revenues attributed directly to Media grew 13% and we drove double digit return on ad spend improvements through continued repositioning of our marketing model. That repositioning is a continuation of our migration from linear heavy media to a fully integrated digital first ecosystem powered by social search, influence and creator content. This is not just a channel mix shift, rather it is a structural shift to an integrated acquisition system that enables continuous optimization, better targeting and compounding returns over time. I also want to add that while advertising spend for the quarter was down, it was driven by planned timing of activations and we're optimistic that the efficiency gains in quarter one will scale as we invest closer to our historic levels across the balance of the year. Finally, we're building a competitive advantage in modern discovery. In quarter one we invested in AI (Artificial Intelligence) readable content, structured data and creator ecosystems to drive agentic engine optimization. This is just the beginning with much more to come. Second is our digital configurations and how we bring LoveSac to life online. Our digital transformation continues to bear fruit as we create a more intuitive customer experience and optimize discoverability and quarter one demonstrated continued improvement. E commerce sales for the quarter increased 7.1% year over year supported by growth in traffic and higher average order values enabling us to increase our E. Com penetration by 170 basis points versus last year. As Sean mentioned, Snug continues to illustrate that a digital first platform with simplified value proposition and streamlined assortment can win on lovesac.com in parallel to our more complex platforms that skew towards showroom demonstrations. Most importantly, we continue to see record levels of web customer satisfaction reinforcing our confidence that our investments are enhancing the customer experience and unlocking demand. Third is our showroom network and it continues to serve as a high impact brand assets that amplify our design for life platforms and anchor our omnichannel advantage. As we scale to 281 locations by the end of quarter one. This fleet continues to deliver compelling returns with one year net cash paybacks and limited cannibalization across markets. Showroom net sales increased 0.5% during the quarter despite increasing traffic pressure across the broader category. Importantly, while traffic was pressured, conversion increased year over year and our quote pipeline increased approximately 12%. As I've shared before, we enhanced our performance based compensation program for the field team starting back in quarter four and we see this enabling our growth. And then finally, our partnership model extends our customer acquisition engine beyond our own channels and demonstrates the scalability and efficiency of our model without ceding control of the customer relationship. While quarter one performance was impacted by lower Costco pop up shop counts and some promotional timing, we're well underway optimizing this engine. Recent tests focus on show segmentation and cadencing, staffing, model improvements and assortment expansion delivered all encouraging operational trends and margin improvement that gives us the confidence to roll these strategies out further. And of course these customer acquisition engines are merely a means to an end to build long term customer relationships. We're laser focused on elevating the experience to match the strengths of our platforms, particularly in fulfilment and the services we provide. Room of choice and Now White glove delivery and assembly pilots continue to perform well and are on track for national expansion this year. Loved by LoveSac our resale platform has built momentum and continues to deliver in line with our expectation and reinforces our circular operations model. Loved by Lovesac, which is now live in 30 states, has seen seven in 10 customers are new to the Lovesac brand, further validating resale as an important entry point to the LoveSac ecosystem. Furthermore, we expanded the program with incremental products during quarter one, including the reclining seat and snug pivoting then to our key growth enablers. Our advantage supply chain delivered solid operational performance in quarter one with consistent progress in processing, in transit times and on time delivery metrics. Our ongoing network efficiency gains help deliver better customer experience consistency and lower cost to serve, which helped offset some of the external cost pressure we saw in the quarter owing to geopolitical uncertainty in oil and freight inputs. Keith will discuss this in greater detail, but let me take a moment to discuss how we're navigating both this increased cost environment as well as the ever evolving tariff landscape. First, with respect to increased oil prices and the impact on our freight costs, our beneficial cargo partnership includes securing capacity at a contractual rate for that capacity. As such, this provides us with meaningful insulation through times like these where spot market prices spike. In quarter one, we benefited from strong partnerships that helped mitigate the volatility of the spot market and we will leverage these partnerships year to go. As for domestic shipping, including last mile, we have planned for rates based on the trailing 30 day oil prices and then second on tariffs, our assumptions haven't changed and we're actively mitigating risk through our sourcing, diversification, operational discipline and Fuel for Growth cost savings program. Regarding refunds I EAPA tariffs we apply for APA tariff refunds and quarter to date we've received $3.4 million. The amount already received is the only amount that has been contemplated in our guidance due to uncertainty of timing and potential recovery of the remaining balance. Lastly, as Sean shared, we are on track with our onshoring initiative for sactional seats launching later this year with the design enhancements of improved comfort, functionality and ease of assembly, all of which are real value to our customers. In sum, our supply chain is becoming more efficient, more resilient and better positioned and to support our next phase of growth. And with that, I'll turn the call over to Keith. Keith Signer (Chief Financial Officer) Thanks Mary. Let's jump right on into a quick review of first quarter, followed by our outlook for the rest of fiscal 27 as we begin with performance metrics. Please note that all references to the first quarter refer to fiscal 2027 unless otherwise noted. Net sales decreased 0.2 million or 0.1% to $138.2 million in the first quarter compared to the prior year period. Showroom net sales increased 0.6 million, or 0.6% to 97.1 million in the first quarter compared to the prior year period, driven by the net addition of 14 new showrooms. Internet sales increased 2.4 million, or 7.1% to 35.7 million in the first quarter compared to the prior year period. These were partially offset by a decrease of 1.0% in omnichannel comparable net sales. Other net sales, which include pop up shop sales, shop in shop sales, open box inventory transactions, and the Love Buy LoveSack program, decreased 3.1 million, or 36.3% to 5.5 million in the first quarter compared to the prior year period. The decrease was primarily attributable to the closure of the company's Best Buy shop and shop locations as a result of the discontinuation of its partnership with Best Buy by product category in the first quarter, our sactional net sales decreased 1.4%, Saks net sales decreased 22.5% and our other net sales, which includes our new Snug platform, decorative pillows, blankets and accessories, increased 228.1% over the prior year. Gross margin decreased 160 basis points to 52.1% of net sales in the first quarter of fiscal 27 versus 53.7% in the prior year period, primarily driven by increases of 380 basis points in inbound transportation and tariff costs and 110 basis points in outbound transportation and warehousing costs, partially offset by an increase of 330 basis points in product margin driven by price increases and cost reduction initiatives, partially offset by higher promotional discounting. SGA expense as a percent of net sales was 49.6% in the first quarter of fiscal 27 versus 48.5 in the prior year period. The increased percentage is primarily related to higher payroll and other overhead costs. The increase in selling, general and administrative expense dollars was primarily related to increases of 1.0 million in payroll associated with higher incentive compensation and 0.5 million in other overhead costs. Rent increased by 0.3 million related to 0.4 million increase in rent expense from our net addition of 14 showrooms, partially offset by a 0.1 million reduction in percentage rent. Advertising and marketing expenses decreased 2.0 million or 10.7% to 16.6 million for the first quarter compared to the prior year period. Advertising and Marketing expenses were 12.0% of net sales in the first quarter as compared to 13.4% of net sales in the prior year period. Operating loss for the quarter was 17.4 million compared to 15.0 million in the first quarter of last year driven by the factors we just discussed. Before we turn our attention to Net loss, net loss per common share and adjusted EBITDA, please refer to the terminology and reconciliation between each of our adjusted metrics and their most directly comparable GAAP (Generally Accepted Accounting Principles) measurements in our earnings release issued earlier this morning. Net loss for the quarter was 11.1 million or negative $0.76 per common share compared to net loss of 10.8 million or negative $0.73 per common share in the prior year period. During the first quarter we recorded an income tax benefit of 5.6 million as compared to 3.8 million in the prior year period. The increase in our effective tax rate was primarily driven by the impact of permanent differences associated with employee benefit and equity programs. Adjusted EBITDA loss for the quarter was 10.5 million as compared to 8.4 million in the prior year period. Turning to our balance sheet, we ended the first quarter with a healthy balance sheet that provides substantial flexibility for lovesac to invest in growth to enhance long term value creation for shareholders. We reported $57.0 million in cash and cash equivalents while retaining $35 million in committed availability and no borrowings on our recently amended credit facility. We feel good about both the quality and quantity of our inventory and our ability to maintain industry leading in stock positions and delivery times. We anticipate modest increases in inventory balance during fiscal 27 versus the prior year to account for product and platform expansion. Second, our strategy is to allocate excess capital opportunistically with a focus on long term value creation and enhancing returns on capital to that end. In the first quarter we repurchased 2.4 million of our common stock outstanding, leaving substantial dry powder available as reflected by approximately 51.7 million remaining under our existing share repurchase authorization. Please refer to our earnings press release for other details on our first quarter financial performance. So now our outlook. I'm sure I sound a little like a broken record, but it's honestly the case that we've seen relatively consistent low single digit category declines continuing. Some weeks improve while others fall short, which seems the reality we're in. From a macroeconomic perspective, we're planning for this to remain the case throughout the remainder of the year while we strive for more. We were pleased to have demand up a couple of percent in the fiscal first quarter and to hold revenues at flattish, both better than the category recall. As we discussed, last quarter revenues for first quarter were slightly behind demand owing to the expansion of our white glove delivery option. Near the end of the quarter, we've seen these orders being scheduled slightly further out than our normal one to two weeks for traditional fast and free delivery, creating a temporary gap. We anticipate this dynamic may continue into the fiscal second quarter as we expand the offerings even more broadly, but we see this as a long term positive since the customer feedback has been extremely positive and it opens up sales that wouldn't have occurred had we noticed the service. There are a few other items to note regarding what's included in our fiscal second quarter and full year guidance. First, we've adjusted our plans to reflect our latest outlook for costs related to cogs and logistics as a result of inflation in materials, energy and transportation. Second, we factored the latest backdrop for tariffs for the remainder of the year and aren't speculating as to incremental changes that might arise. Third, as it pertains to tariff refunds, we are including solely those that we've already received and are not including potential future recoveries. Please note that this means the fiscal second quarter and full year include approximately 3.6 million of refunds collected, which benefits gross margins and includes a small amount of interest in our interest and other income line items. Specifically, for the full year, we estimate net sales of 700 to 740 million. We expect adjusted EBITDA between 35 and 46 million. This includes gross margins of 56 to 57%, advertising and marketing of approximately 12% as a percent of net sales and SGA of approximately 40 to 41% as a percent of net sales. We estimate net income to be between 5 and $12 million. We estimate diluted Income for common share in the range of $0.34 to $0.81 and approximately 14.8 million estimated diluted weighted average shares outstanding. We estimate a full year effective tax rate of 39 to 40% at the midpoint of the range, though this can vary widely depending on where pretax income ultimately ends up across the range. Within our outlook for the second quarter, we estimate net sales of 157 to $166 million, representing modest revenue growth. At the midpoint, we expect adjusted EBITDA between negative 4 million and positive 2 million. This includes gross margins of 57.5 to 58.5%, advertising and marketing of approximately 14.5% as a percent of net sales and SGA of 44.5 to 46.5 as a percent of net sales. We estimate net loss to be 3 million to 7 million. We estimate basic loss per common share to be $0.20 to $0.48 with 14.7 million basic weighted average shares outstanding. In summary, we're balancing prudence and efficiency with our belief it's essential to stay focused on the big picture. That's the massive long term opportunity for tremendous value creation for all Lovesac stakeholders. We're building the Lovesac brand and investing in new product innovation that spans style, function and new categories to support a powerful multi year secular growth outlook with macro upside exposure as icing on the cake. With that, over to you operator. OPERATOR Thank you. We'll now be conducting a question and answer session. We ask that you please limit yourself to one question and one follow up. If you'd like to ask a question, please press Star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Thank you. And our first question is from the line of Thomas Forte with Maxim Group. Please proceed with your questions. Great, thanks. Thomas Forte (Equity Analyst) So Sean, Mary and Keith, thanks for taking my questions. I have one question and one follow up. So Sean, high level Mary used the words AI. So I'm going to blame Mary for giving me the opportunity to ask this question. Can you think about agentic commerce in the category and what LoveSac is doing to capitalize on that opportunity? Mary Fox (President) Thank you Tom. I appreciate the question. Yeah, I mean, I think obviously Thomas, we have seen a couple of things, you know, a lot more of search that customers are considering as they really think about a very significant purchase is Coming through large language models (LLMs). So the teams have been really working to ensure all of our content is readable. You know, with large language models (LLMs), there's often a lot more words that help kind of describe what people are looking for versus traditional Google search. So the team have been doing a lot of work around AI readability and kind of getting all of that structured in place. I think the second piece is then we think about working and piloting, for example, ChatGPT (Chat Generative Pre-trained Transformer) in terms of ads and the ability to be able to click through from that search to take us straight through to our site. And then, as I had shared, because everything is fully connected, is we've done a lot of work about how do we actually improve our site experience. So the searchability becomes a lot less friction and enables them to be able to drive conversion a lot faster. So a lot of progress the team have been doing on the site. I think that's a lot of why the performance in Q1 was so strong. And we're seeing an uptick in terms of, you know, our share of voice on LLM. So, you know, more to come. It's just really kind of started, Tom, but we see a lot of opportunity here. Thomas Forte (Equity Analyst) Thank you, Mary. That was a great answer that I appreciate very much. All right, so here I'm a little confused. So when I think about Love by Lovesac and I think about performance in the quarter where you had the strength in assortments priced at 6,000 and higher, and I think about the potential for your recommerce effort with Love by LoveSac to give you countercyclicality. So how are consumers using Love by LoveSac? Are they using it as a way to engage with the brand and save money? Are they help me understand how Love by Lovesack, you did a great job of explaining the more than 6k and the less than 6k, but I'm confused in the Love by Lovesac part. Mary Fox (President) Yeah, no, it's a great question, Tom. And obviously, you know, having studied us for so long, Love by Lovesac really just started rolling out this year. So we're in 30 states. We really haven't switched on marketing to tell people a lot more about it because we've been really still working through making sure the processes from searchability on Love by Love, sacrificing through to the transaction and shipping out and so forth. You know that you can really have a lot more volume. So I think that's partly on us that we want to make sure we can sustain a great experience and then build it out and, you know, and I Think as people learn more and more about it then to your point, there's an opportunity and as I indicated earlier, we see a lot of opportunity. There's a lot of work the teams are doing about how to tap into that lower size transactions. So you're spot on. That's an opportunity. So expect to see more from us as that builds out. Thomas Forte (Equity Analyst) Thank you, Mary. Thank you, Tom. OPERATOR Our next questions are from the line of Brian Nagel with Oppenheimer. Please receive your question. Brian Nagel Good morning. Thanks for taking my questions. So the first question I want to ask been more near term, but you have a lot of moving pieces here with sales and we talked a lot about the choppy macro backdrop. But if you look at the Q1 results, is it fair to assume that the business was slower, there was a slowing from what we saw, let's just say the second half of last fiscal year. Keith Signer (Chief Financial Officer) Hey Brian. Yeah, Keith. You take it? Yep. If you want to jump in. It's a little bit of a difficult question to answer. I think, you know, a number of factors are at play. I think to start with what those moving pieces are, you know, the macro uncertainty within sort of that like let's call it the upper middle class that we've talked about was, was definitely clear to us. And you know, and when we talk about seeing strength above 6,000, I mean it gets even stronger when you get above 8,000, get above 10,000. And you know, I think what we're seeing there is the very high end is doing very well. Right. I think that what we started to do during this quarter was to introduce new strategies to increase attractiveness of opening price points to try to rekindle some of that transaction growth below 6,000. You saw us running some promotions around our Rain Chenille fabric, which is a fantastic fabric. We liked what we saw from that. You're going to see more expansions of that coming not only in 2Q but as we get into 3Q. And I think what you're seeing is hopefully going to be improvement in that trend as well. So Mary mentioned that in her comments. You're going to see a lot more coming on that as we try to really bifurcate our marketing and promotional approaches to maintain strength at the high end where the demand is strong, but increase the opening price point attractiveness. We did have some shifts in timing in relation to our spend as we're experimenting with a few new of these initiatives as Mary talked about. So we did have a lighter spend in Q1 than the run rate. That spend should step back to more Normal rates for the full year. That's part of this as well. And we're about to have a whole bunch of new product news, so nothing surprising. And even to go back to, like where we gave guidance for the quarter, we came in at the high end of the range from what we had originally provided. So I think generally speaking, giving all of the moving pieces, because you're right, there are a lot of moving pieces. I think the quarter ended up in a good spot for us and that sets us up for, hopefully, momentum in the second half. Mary Fox (President) And, Brian, maybe if I can just add one other point to what Keith shared. So, you know, Keith had talked earlier, you know, our demand outpace net sales because we are building out our paid services. So if you actually look at the demand growth relative to the revenue growth in Q4, it's pretty much in line, but obviously with a bit of a lag as customers are selecting their delivery and installation dates, then you are seeing that bit of a difference in the delta of demand and revenue. Brian Nagel No, that's helpful. I appreciate all that. Then the second question I want to ask is on tariff refunds. So we're starting to hear, I guess, more of this throughout the consumer sector, broadly. So you've started to receive these refunds. So I guess the questions I want to ask is, is there any insight into how much more you could receive and the timing of that and then probably more importantly, how should we think about the ways in which LoveSac plans to utilize these refunds? Keith Signer (Chief Financial Officer) All right, I'll start, and then I'll hand it over to Mary. So to give you some context, we applied for and were accepted for 20, meaning our refund application was accepted for $20.8 million of total refunds. We received the original 3.4 at the very beginning of the opening of the window. And it's been in pause ever why we're taking this approach. So as it relates to timing for the remainder, we don't know. You know, I think that's why we've taken the approach we have and consider it. You know, we'll include it and report on it as it's received. You know, so fingers crossed that this comes. We would love to have that back. I think, Mary, if you want to talk about some of what our plans are for that, I'll kick it over to you. Mary Fox (President) Yeah, sure. Thank you. So I think, you know, obviously, Brian, we will always plan on what we have in our bank account because there's still a lot of uncertainty around, as Keith said, timing, but also actually receiving the rest of the refunds, the team are actively in the customs portal, so your guess is as good as ours in terms of when it will come in, but some indications that it could be in the next month or so. And then I think in terms of how we would think through in terms of that benefit, should everything come through. You know, we've worked through a number of scenarios to really think in terms of what we would do with that benefit. Some could support profitability, some could be around strategic priorities. And we'll also learn a lot more in terms of how, you know, we would treat this given if there's other considerations. So we don't want to count on it yet. But obviously the team has done an amazing job getting in for those applications and receiving them. So we'll share more with you as we get those realized. OPERATOR Very helpful, thank you. The next questions are from the line of Maria Rips with canaccord Genuity. Please receive your question. Maria Rips (Equity Analyst) Great. Good morning and thanks for taking my questions. Maybe just to follow up on the last question, can you maybe just talk a little bit about any changes in consumer behavior sort of this last quarter? I know you talked about demand below that 6,000 level, but anything incremental you would highlight in terms of maybe configuration mix, financing attached response to promotions. I guess more broadly, has the consumer you're seeing in May and June gotten any better or bearish versus what you saw in February? Mary Fox (President) Yeah, Maria, thank you for the question. So I mean very much similar to what we have seen and what we've been sharing. So continued acceleration on the larger size transactions and a lot of strong performance there as well as also the value added additions such as recliner LoveSoft and storage seat, just to name a few. So very much that trend is continuing and still seeing that softness in the smaller size transactions. So really nothing new for that. I think as we've always shared, you know, customers are more focused on timing so as we start an event it can be a little bit quieter in terms of their conversion and then as the event gets to a close then you get a lot of activity. So you're just seeing definitely that bell curve moving out. I think Keith, you know we look at obviously at things like financing and we're really not seeing an uptick on uses of financing so really not driving there. So I think you know our job to do as we shared is continue to accelerate on what's working as we see our consumers responding and then also doing some more work in the of key shared on that smaller size transaction. So that's really kind of, Maria, what we are seeing up until now. Shawn Nelson (Chief Executive Officer) Got it. That's very helpful, Mary. And then can you maybe give us a little bit more color on the domestic production that's starting this summer? I guess. How much of your production cost base does that initially cover? What's sort of the realistic time timeline to scale that volume? And then how should we think about sort of the cost differential versus importing, sort of in the rollout phase, but also at scale? Yeah, thanks, Maria. This is Sean responding. We're very excited about onshoring. You know, I think all of us are living on the same planet and observe all of the volatility that, you know, this endeavor can hopefully help us mitigate on top of, of course, the sustainability considerations, on top of cost considerations, which at the outset, our goal is to come in flat. Right. Manufacturing, I'll call it like for like, but I'll come back to that. It's not like for like manufacturing. Like for like in the United States versus say Vietnam, Asia is a very difficult proposition. And in fact, it was not achievable on a true like for like basis. Meaning we're not just making the same product out of wood here in the United States. We've taken a whole new design approach to the product. Designing it for manufacturing, designing it for automation. And yes, we're on track to begin that, you know, the early stages of that manufacturing late this summer. And so we're very excited about that. It's going to take like any massive undertaking, it's going to take a period of time to come to scale. And so we, we are not planning any material pickup in margin or even offsets to this supply chain in this fiscal year. And even though we will see product rolling through and selling through in the second half of the year, it's still got a long way to scale. We believe that we'll have the capacity and the opportunity in the future to make the consideration of, for instance, eliminating our overseas manufacturing for those SKUs. And again, I'll remind us that we're talking about in the, in the early stages of this sectional seats. But we're leaving our options open. You know, in a volatile world, optionality is key, redundancy is key, and it's served us well as we've seen manufacturing ebb and flow between the various countries that we operate in in Southeast Asia and in Asia more broadly. So, you know, no specifics other than those basic outline. Those basic outline factors. As we move into this endeavor, we're really excited about it and I think as we look, we've spun up a lot of new manufacturing operations as we've hopped from country to country through all of this volatility. And what we've seen is that there's always opportunity to do better with time as we observe the manufacturing process, work with our partners to trim costs, revise the product, revise supply chains and find ways of making it more efficient. So we expect the same here. In fact, in this operation, we're more integrally involved, obviously than our typical arrangement with partners overseas. But we will not own the factory, we will not operate the factory. We're not interested in doing that fundamentally as a business. And look, we view so much of this as upside to the business and frankly, another moat around LoveSac. Lastly, I'll just remind us that we're also talking about not just a product that's been redesigned for manufacturing, but what I'd call a better product. It's going to have features and benefits that the current sactional seats do not offer. They're very cool, they're very meaningful. There will be new patents and intellectual property protections associated with that. And we're just super excited about it. OPERATOR Our next question is from the line of Eric Delerie with Craig Hallam. Please receive your question. Eric Delerie (Equity Analyst) Great. Thanks for taking my questions and congrats on the continued progress with challenging macro backdrop here. First for me, just a clarifying question around the difference in the behavior that you're seeing in transactions below and above 6,000. So there's basically a natural mix shift going on right now as transactions above 6,000 are growing very robustly. I think you said mid double digit. Is your approach here to deliberately accelerate or deliberately slow that mix change or are you kind of mix agnostic here and you're of course just trying to grow both buckets. Just looking to kind of clarify your approach to this bifurcation that you're seeing. Mary Fox (President) I think, Eric, you know us, we're very competitive and we want to win. So we will be very deliberate in accelerating all opportunities and we see customers really responding. So 100% continue to drive that and accelerate it. But as Keith said earlier, you know, there's a huge opportunity for us as we think through in terms of recapturing some of those customers at the under 6,000 transaction. We see it in quote growth, you know that they're there, but they're just taking longer to be able to convert. So there's more initiatives that are coming this year that we'll share more on the next earnings call that will enable us really to tap into that. So, you know, you can expect us to try and drive both. Eric Delerie (Equity Analyst) Awesome. That's helpful. And then just in terms of the marketing engine improvements, I mean, it seems like this is really starting to flow through the P and L in the past couple quarters. Could you maybe give us just a couple more examples of like, you know, what you've done already, Whether this is more of like a top of funnel traffic generation focused or more conversion focused, what maybe has yet to make a material impact so far and how, if at all, does this tie into your sort of fabricated approach with these transactions you're seeing? Thank you. Mary Fox (President) Yeah, great question. Thank you, Eric. So I think as we've shared, the continued pivot for us was around moving to this paid, earned, owned operating model, really driving out the stronger unity and economics that you referenced first. That's around optimizing media mix and moving out of much more of a traditional linear TV digital social. First investment teams have done a great job around building a lot more creator content that helps build the equity in the brand. So I mentioned earlier the Here for Life campaign that really helps build brand equity at the top of the funnel and we're seeing a lot of strength there. We're seeing an uptick in brand health. You know, search dynamics are doing really well. But then as we kind of optimize through and down through the funnel, you know, just really being able to be a lot more focused, you know, whether it be thinking about digital, video and social, that helps us drive that conversion through the funnel. So things like YouTube have been really strong for us as the teams are doing test and learn. So I think one of the things that's really good with the new structure we put in at the back end of last year, it's just they're a lot more agile, they're making moves faster and a lot more tools to be able to help us to do that. So it's fair to say continued investment because our brand awareness, there's still a lot of opportunity, still a lot of customers to attract. So you're going to continue to see us doing that through broader campaigns, but then a lot sharper through the funnel in terms of driving out the conversion, including, you know, to Tom's question earlier, how do we really make sure agentic commerce, you know, is a big frontier for us so, you know, continue to see more of that evolution. That's very helpful. Thank you very much. Thank you, Eric. OPERATOR Our next question is in the light of Matt Karanda with Roth Capital. Please proceed with your questions. Matt Karanda (Equity Analyst) Hey, guys. Thanks. Just given the higher end strength that you mentioned, wondered if you could maybe just set the table for the larger format product that you expect to introduce later this year. Wanted to hear a little bit, I guess, about updated thinking around timing of the introduction. Anything material that you built into the sales guidance for the year and then how we should be thinking about cannibalization kind of the larger configuration sectionals. Shawn Nelson (Chief Executive Officer) Great question, Matt. Thanks. Yeah, we're very excited about the larger format sectional sofa that we're introducing in the latter half of this year. To get right to the question, we do have sales planned in this year for this product, but we have purposely planned very little from expectation perspective. From an inventory buyer perspective. We obviously would love to outperform and see this as a healthy, exciting product launch that will more materially affect next year. But there certainly is an expectation built into this year. I think it's important to zoom out and understand our overall perspective on sectional sofas and on competing in general for more market share. Lovesac is evolving very rapidly right now. And over the next 18 months, investors, you know, if we were to fast forward even 12 months from now and 18 months from now, Lovesac will look and show up very differently and become in many respects much more competitive, both with what I will call incumbents in the home category, you know, those larger firms that offer full catalogs. And, you know, while we will be a long way from any kind of full catalog, we do believe that in the realms that we intend to play in. So now we'll start with the living room. We can be more competitive if we show up with a more fulsome product offering. So this goes beyond even just sectional sofas. This goes into some very limited accent products and what we'll call complements that will allow us to complete the room and compete better, compete better through photography, online catalog and the overall merchandising and consumer experience. But we will be anchored in the living room by sectional sofas. And that includes snugs. You know, Snug is getting a corner piece this year very soon. Snug is getting the swivels for the chairs, which I'm actually sitting in right now. And it's, you know, a really exciting product. I think I have more snug chairs and swivels in my home, obviously on prototype than any other LoveSac product in my life now. And it speaks to this idea that Loves that consumers can have any one of these three platforms that we're talking about in their life in the same room, even in different rooms in different places and we, we absolutely intend to take more market share of the living room and by the way, other rooms of the home that have living room esque soft seating experiences. So the. So rather than even view Sactional as the anchor of this business on the go forward, I'm talking about the, let's call it the living room business. We really should shift our thinking to sectional sofas. And by the way, in the consumer's mind, that's what LoveSac is famous for. We see it reflected back to us every day on social media. Consumers don't speak to hey, check out my sactionals. They say, you know, check out my love sack. And it's often confusing to me. As you know, the father of this brand, a lovesack, used to be a 6 foot 8 foot beanbag. But a love sack now in a customer's mind is a really big, amazing, gushy, ushy sofa that does all the things and by the way, each one of our platforms will do all the things in their own way, including this one that we're introducing in the back half of this year that you asked about. So we're really excited about it. It's part of a bigger strategic move and it really kind of sets the table and solidifies our standing again to compete for more market share as we then move into the new room, which obviously is also a massive focus that is taking a lot of attention, energy and investment inside the company now. Matt Karanda (Equity Analyst) Appreciate all that detail, Sean. Thanks. And then maybe just with the new room that's coming and kind of the wider assortment that you're referencing, curious how we should be thinking about showrooms and expansion there. I know that you guys have slowed the expansion a bit, but how should we be thinking about how the assortment fits into the existing showroom footprint that you have? Do we need to sort of change some of the posture of the showrooms to make room for the new products? New room that you'll be introducing next year. I wanted to hear a little thoughts on sort of the showroom strategy. Shawn Nelson (Chief Executive Officer) Yeah, this is a great question, one that I'll be a little bit vague about because we're not quite ready to reveal all of our plans there. But I'll try to give you some breadcrumbs. LoveSac is one of the world's foremost operators of small footprint specialty retail transacting on very large ticket, high margin products fueled through advertising. Fueled by advertising. We don't want to mess that up. Right. We recognize the power in that. As you, as anyone can see, stores still represent almost 70% of our sales. And we love that because these are customers that we have a deeper relationship with. We know them, we hear their stories, we plan with them, and then we continue to follow up and clientele with their friends. There isn't a better outcome than having face to face real world transactions and relationships, especially in this day and age. And that's becoming more and more true as society continues to evolve and become more digital. So we are absolutely showroom friendly and excited to be in that business. At the same time, our original mantra continues to be true. We want as few as we can get away with. Right. Like we are a business, we intend to be a high margin business. Obviously, we're investing very heavily in all this innovation that we've spoken of, which is, you know, compressing our overall margins right now. And to some degree that, you know, that will be the case for a while because we have a lot of innovation to unleash. But stores and the rent for these, and we now, you know, call them stores, call them showrooms, represent our largest expense, you know, the rent expense. And so what I'm saying to you, as we move into a broader assortment, no, we don't intend to grow the size of our footprint very much. Already though, the leases we've been signing is we've gotten sharper real estate strategy, frankly, more power in the marketplace because LoveSac shows up with very high sales per square foot, et cetera. We've been signing, you know, slightly larger leases for a long time now and found that to be very successful, still putting up the same and better metrics from a sales per square foot and overall performance standpoint. So we'll continue to allow that square footage to creep just a little bit. But they're still, you know, in that 1000 1200. A big love sex store might be 1500 square foot range. As we look toward the new room, again, I'll keep it vague other than to say we recognize the power in focusing a small footprint on selling anchor items. So the anchor for our living room format is the sectional sofa. And we don't want to dilute that. I'll also say though that we want to lean into that strength, amplify that strength, and be able to take advantage of now new opportunities to have these brand billboards in the best geographies and real estate in the United States of America. It's, you know, another piece of this overall marketing engine that we've built. So lastly, I'll just say that we do also like the idea of every one of these wonderful associates that we have, you know, we have, you know, almost 2,000 sackers around the country representing the brand we love, empowering them to sell against a whole catalog and use our website as that full digital configuration experience. So even as we talk about some of these complementary products that may or may not appear in their stores, as we talk about new room products that may or may not appear in their stores, their ability to sell against a full catalog of product that's broadening and create these wonderful interactions with customers. You've seen how we can miniaturize our products through the blocks that have been, you know, copied by others at this point because they're so effective. But our ability to sell very large ticket, high margin items out of small spaces is a superpower of ours and we intend to lean into that as you watch all this innovation unfold of next year. So we have a North Star of keeping, let's just call it rent low, expenses low, and sales higher and higher. And that's what drives our decision making in that realm. Keith Signer (Chief Financial Officer) Just to throw a CFO style bullet on the end. And just for fun, in the simplest form, Matt, the way I think about this is as opposed to here's our store, how many stores can we have? It's what market share do we think the lovesac brand can take across all of these products and platforms? And then what's the most efficient way to get it? We're going to test a few things, learn from that, what gives the greatest customer experience and then let the data tell us what the next steps are. So just a slightly different summary on exactly what Sean just said. Matt Karanda (Equity Analyst) Thanks guys. Appreciate all the detail. OPERATOR Thank you. Ladies and gentlemen, this concludes our question and answer session. I'll turn the floor back to management for closing comments. Shawn Nelson (Chief Executive Officer) Thanks so much to all of the Lovesac family out there that supports this brand and company and our Lovesac investors that continue to give us the support we need to unfold this awesome vision and ultimately inspire humankind to buy better stuff, saying buy less stuff. Have a great day. Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.