I think we're ready to get started with our next discussion. So I'm Steve Zaccone, I cover hard lines retail at Citi. We're joined today by the Lovesac management team of Shawn, Mary, and Keith. Thank you so much for joining us. I think before we begin with a fireside chat, Shawn, you had a couple of remarks you're gonna start off with?
In case you're not familiar with Lovesac, we are now celebrating our 25th anniversary with even a book I got to publish four days ago called Let Me Save You 25 Years. You can find the whole story. It's a lot of fun but company founded in my parents' basement, still founder-led. We came public six years ago on Nasdaq, and have actually had a great time, I think, in the public markets. Grown the company, I think, seven times since in this last five and a half years. If you're not familiar, if you've ever seen a giant not bean bag, like six or eight feet across in a celebrity home or anywhere else around the world, it's probably ours.
And we've graduated into couches that you could have the rest of your life, set them up, arrange, rearrange, et cetera. Call them Designed for Life 'cause they were built to last and designed to evolve, and that influences all of our new product introductions that you'll see over the next decade or two as we go the next 25, and we're, you know, as we focus on building a brand that people love. So, really proud of the team here. Mary, my business partner, President and COO, and Keith, our CFO, who joined more recently. So-
Great.
Great to be with you.
Great. Why don't we start off with the near term, yeah, and how you're competing in the, you know, the current backdrop? It's gotten a little bit more competitive in the home furnishings area. It's gotten a little bit more promotional. You know, why don't you share how you're thinking about the near term and how things have been trending for you?
Yeah, I'll let Mary-
Yeah
... start with that one.
Yeah, no, thank you for the question. Obviously, you can see from our results, you know, we continue to gain profitable market share. We've done that ever since we launched the brand, actually, and obviously since we went public. So gaining share, obviously, we've seen the category do really well, and then obviously kind of resettle back down from that COVID peak. And for us, we continue to drive, you know, the brand awareness, which we see the great strength of that. We have, you know, incredible product that our customers love through the Designed for Life platform. Promotionally, we have seen more depth, but, you know, we've actually, while we've adjusted our promotional schedule, we've actually remained pretty tight. And, you know, the category is a lot more promotional than we've been in depth.
So we bake that in and continue to do really well, as we've demonstrated from our results. I think in the last four years, we grew 200%, and our best competitors kind of growing at, like, 30%-35% over the last four years. So we'll continue to play on our playbook, and really drive the, the awareness of the brand that we see. As Shawn said, you know, plenty more runway to go.
Fair play. What are you seeing from customer buying behavior? And I guess, you know, we're focused on, you know, what's happening in the future as rates potentially come down, right, and housing turnover starts to improve. How do you think about the potential for customer buying behavior to change as maybe rates become a little more favorable for turnover?
Mm.
Yeah, I think we are obviously pleased to see the opportunity for rates to come down in the nearer term. Still, cautiously skeptical about what that means over the longer term. And so, so far in the home category, by our real-time observation, the consumer is still cautious. You know, we've been... I'll call it, not Lovesac per se, but the whole category has been sort of bumping along the bottom for a little while now. And I think going into last year at this time, at the same conference, everyone was kind of predicting a second half boom-
Yep
... in the year that we just finished. It was really quite flat throughout in terms of consumer behavior. Thankfully, you know, we produced growth where others didn't. There's lots of reasons for that, but you know, we're happy about that. At the same time, we're very cautious in terms of our own internal planning and expectation setting for the year to come, just because it'll be interesting to see when the consumer gets the memo. I mean, anecdotally, I'm witnessing action in the real estate market. I think that, you know, home sales and these other kinds of things will certainly bode well for our whole category, and probably for us as well in the nearer term. It's just hard to look much further beyond that and know what happens after that.
But, you know, what we'll do is continue to focus. We're, we're up to 270 Lovesac physical locations. There's still actually a lot more runway on that path to growth for us, thankfully. We're, we're in a nice place in terms of we're big enough to matter, I think, but small enough, we still have a lot of runway just using the playbook we're familiar with. Meanwhile, we continue to invest on innovations that will launch year to year to year. As you've seen this last year, Angled Side far exceeded expectations and our own expectations in many respects. And then, you know, whole category shifts coming up. But, that's where...
You know, that's the fact that we've been able to generate, you know, healthy EBITDAs and throw off cash while investing, that is what we will continue to do. And so that's been our focus. That'll be our focus even as the macro ebbs and flows and shifts as it might.
Why don't we double-click on that? Oh-
Yeah, no, I think one thing to add, you know, as, as the macro does move up, you know, we have the ability to chase that growth fast. We saw it through COVID as the category really, you know, tipped up into high growth, and our delivery times were continuous. We weren't out of stock, and many others were at 9 months, a year worth on lead time. So I think the exciting thing, as Shawn said, is we'll plan conservatively. We have top ambition, so underneath, we're always driving to be the best. And we have the ability to turn it the second that we start to see that growth jump up.
Got it, got it. If I could just dig into that just a little bit. This is, like, a superpower of this business model. So coming in as CFO, this was super exciting to me. We're not a traditional furniture company, not a traditional DTC, not a traditional small box retailer. And we're not merchant-led. We sell seats, and sides, and , and more, and we have no shrink, we have no obsolescence, right? And we turn our inventory 10 times a year. We're product-led, not merchant-led, and what that means is, as that demand comes back, we don't have to make a bet on when that demand recovery really happens ahead of time. Most of what you think about, a lot of what we sell from a dollar perspective, are seats and sides, and they don't change, and we have a diversified supplier base.
We can ramp that up and participate in the upside demand-
Mm
... very, very quickly, and much faster than many of our peers. So, you know, when you think about the working capital needs of our business are very light relative to our peers, and we don't have to anticipate that recovery and commit working capital to it ahead of time. That, that's a really powerful advantage financially for us.
Got it. Why don't we talk a bit about the secret sauce of the brand, maybe for with the customer? 'Cause I think there are some people who know the brand, but there's others who maybe don't. But talk a bit about the secret sauce of the, of the brand and the lifetime value of your customer.
Yeah. We make products that are built to last a lifetime, but more importantly, can evolve with you as your life changes. So if you're, if you didn't understand every word that came out of Keith's mouth in terms of seats and sides, take Sactionals. They're our clever couch that you could have the rest of your life because of these attributes. With two simple pieces, seats where you sit, and a side that could be an arm or a back, they're infinitely interchangeable. You can grow it. You can shape-shift it. You can add to it. My Sactionals pieces in my living room—I have four kids, two cats, a dog, I've been through six moves, and some of my Sactionals pieces are 16 years old.
Wow!
Some of them are brand new. Some of them are now Storage Seat, one of our more recent innovations. Some of them are now Angled Side, a whole shape-shifting in terms of the profile and aesthetic of the couch. And now all of them have StealthTech. If you understand, that's our embedded home audio system, charge your phone, arm sitting on the couch charging. All of these technologies, innovations, add-ons have come many years after the original Sactionals were born. It took us a long time to figure out our business and grow to the scale we're at. But my point is, that brand promise, like, this thing that you're investing in, you might spend...
Just to put it in perspective, like, a Sactionals setup is typically $5,000, $10,000, $15,000, $20,000 is not uncommon because, you know, people are doing giant basements configurations with StealthTech surround sound embedded. It's invisible. It's really cool. But they can also buy it without any of those things, and as we continue to invent those things year after year after year, they can add it to what they already have. So this Designed for Life benefit to the customer is unlike, I think, any other brand in product land. Forget furniture, in product land that exists. Like, almost every other product we own, you know, tells us it's out of date a year later or two, and just gotta buy another one.
Not with us, and so we're very proud of that, and it resonates with humans that have babies, kids, pets, dogs, friends, pizza, wine, moves, spills, divorces, you know, split it in half, and it goes teasing. But, like, this product can roll with you as life changes, and that design philosophy obviously will inform all of our future designs, and so we're working on more additions to this platform and the Sac platform. Believe it or not, the beanbags, not beanbags, are filled with foam, very much still alive, still a growing business. But everywhere throughout the home where it overlaps with tech, you know, StealthTech alone, this surround sound system I keep talking about, Harman Kardon sound, invisible home audio, perfect, no sound quality loss audio, hidden, completely out of view inside of your couch. We invented that. We patented that.
Very proud of that, defended that, and we've, it's become a major component of our business, driving AOV through the roof over the last couple of years. Well, there's more of those to come, where home overlaps with tech, and it will all be designed for life, and I think will continue to make us hypercompetitive. So meanwhile, whatever happens in the macro, believe me, we're plugged into. We live and die by research. That's where these products come from. They're not from my own brain or something. I mean, you know, we're inventive, but we invest a significant amount in consumer research. We heed that research, and we respond to it.
And so because we see a few decades' worth of innovations to come from Lovesac in big categories, that will take us a few decades, ultimately, to exploit and to dominate like we have with couches, we're patient. And so we'll make very, I think, pragmatic decisions in years like these that are choppy and strange and migrating, and when there is hay to be made, we'll react quickly because of these attributes that Keith described, where we can, you know, either pull back or lean into our supply chain very robustly and rapidly because it's rooted fundamentally in two SKUs. Like, half our business almost is these two SKUs that, right now anyway, and we will use these same attributes to guide us into other product categories.
Could we get a teaser or maybe some product adjacent, please?
Not yet, but so we've been very clandestine about our product development roadmap because we don't do a lot of things. Like, all of our competition, listen, this business started growing at the 30%-40% CAGR for the last decade, almost, when we jettisoned all the rugs, lamps, bowls, baskets, decorative accessories, et cetera, candles, whatever, that all of our competition trades in.
Yep.
Now, I'm not denigrating them. There are some, there are some great brands in the home space, beautiful products, et cetera. But we've chosen a different business model that has very different attributes, fundamentally, and we've paired that with a marketing model that is crazy effective. Like, our Return on Ad Spend is, I think, the best there is. I think we're one of the most successful direct-to- consumer brands, if you wanna call us that, and we're truly omni-channel. We don't, we don't wholesale. You can only buy our stuff through our shop-in- shops, our retail locations, or our website. So we have the customer data of everyone who's ever bought from us, and that's very valuable, especially for a product point of view that engenders repeat business.
Like, 40% of our transactions are repeat right now, and we, and we barely lean into that, because the first purchases are so chunky, $5,000, $10,000, $15,000. We're chasing those at the moment. So we've been secretive, but the goal is to, with Keith's onboarding, is to build, an economic outlook, you know, from an FP&A perspective, et cetera, that's reliable, to give you a long-term target model that can be reliable and believable. And on top of that, then maybe share a little bit more about our future. But the broad teaser is this: where, where home overlaps with tech, we will be in a way that others are not, and we'll pair that to this very robust marketing engine that's very effective, and we will repeat that cycle over and over again for as many years as it takes.
And that's, that's one thing that I think is underappreciated with Lovesac. I'm a founder. I'm almost six years past an IPO, and frankly, I'll be here as long as you'll let me be, because we've decided to build a business that can... and a brand that can be here for decades. Our products last for decades, and we're not joking around about that. We're not chasing an exit. We're not chasing some arbitrary whatever, and so we can both be patient and ridiculously ambitious simultaneously. And you can believe that or not, but that's, that's, that's how this team feels.
Yeah. I think the other piece, so we talked about the secret sauce around Designed for Life platform. We talk about the strengths of the brand, all the investments that we do. We talk about the supply chain and efficiencies, but I think the other element is, you know, how we demo. You know, we have, as Shawn talked about, 270 touch points across the U.S., and they pay back in about a year. That is phenomenal. And our productivity, 'cause they are like 800, 900, 1,000 sq ft, they are mean machines that have productivity that is just below, you know, a Tiffany and an Apple. So just, you know, everything underlying us around this Designed for Life long-term outlook is also just a high level of efficiency around, you know, how we manage the business, how we demand high ROI.
We will continue with that secret sauce because we see that being, you know, very competitive for us.
But the evolution of that store presence, you know, how many more could you have over time? And then I think you've done some unique partnerships-
Yeah
... with some bigger players.
Yeah.
Like, talk about could there be more opportunity in the future-
Yeah
... with some partnerships?
Yeah, I mean, we've shared that we see, you know, headroom still with the touch points of at least over 400 in the U.S. We also see opportunities around the partnerships. Now, we're very careful. We have two very good partnerships today with Costco, obviously, you know, an industry-leading retailer, and then also with Best Buy, who is really the leader in the electronic space. Because with StealthTech, as Shawn talked about, that's often where it's on people's minds to go and buy it. So, you know, very thoughtful around how that model is, but we do see a lot more headroom, and then obviously, maybe at some point also, you know, international.
So, you know, we're continually evolving, and then, as Shawn talked about going into other categories, then it would probably also, for us, make sense to partner with whoever is the best, you know, other partner in those categories. 'Cause we know consumers come to us because they know of the brand, and they've heard of it. I mean, 40% of purchase awareness is driven by word of mouth, so friends and family members saying, "Hey, we've got this amazing product. It's phenomenal. Try it." And they're like, "That's great," and they go and try it. But then we also know we need to be where the purchase is on their mind. So that partnership model will evolve, byt we're very thoughtful about it.
Yeah, and by the way, besides shop-in-shop configurations, like we were speaking about, and the opportunities in that realm, which are myriad. Like, we're with Best Buy. And by the way, we've been with Best Buy for a number of years now. Like, that's not the obvious place for a giant beanbag company originally, or even a couch company to go, but we went there even before StealthTech, being very strategic. And so my point is that both obvious and not obvious can be these partnerships. Beyond, though, distribution, call it, or exposure to the customer, there's also the brand. So we've continued every year, really almost every quarter, to develop partnerships, you know, recently with Swarovski instead of Nordstrom, around our Footsac blankets. Machine Gun Kelly collaborations around our 25th anniversary. You know, Travis Barker from Blink-182.
I mean, Stacey Bendet, designer, CEO behind Alice + Olivia high fashion brand. I mean, these collaborations. Listen, our competitors are not doing this. They're not playing in those realms because... And so we're and gaming, you know? We're the official gaming chair and have been in at all kinds of these different events and with some of the... And you talk about an industry that's experiencing tremendous growth and cannibalization of other media industries. For us to be in that realm and resonating with tweens, with college kids, with young adults, Lovesac becomes the aspired to. Like, even if you put the teen lines or kid lines of other brands in your kid's bedroom, they don't aspire to that brand. Like, they might aspire to ours because of the way that we're developing our marketing.
So we're thinking in decades-
Mm.
In terms of these partnerships, not just on the distribution side, but on the brand side as well.
Okay. Keith, let's put you on the hot seat here, the new CFO. Can you talk a bit more about the levers to get that top line to flow to the bottom line? What do we need to see to drive higher operating margins for the business?
Sure. So this really is the next phase for us, transitioning from entrepreneurial growth to growth at scale, and it's taking the cash that we're generating through all the products that Shawn and Mary just talked about, and reinvesting in those future growth drivers, right? We are a brand, not just a product. We know what the customer would like us to bring Designed for Life and circular operations and all these other cool things to where home meets tech, and we're already working on them. So for us, what it boils down to is, take the cash that we generate from those products, and how do we balance the reinvestments in those future drivers? So aesthetic products, functional products, new categories, international and services, all these things are coming. We're already working on a lot of it. Some are...
Some are huge, and some are more around the edges, and we're gonna balance that out. But, but that's the structure that we're putting in place right now, which is to make sure that we are investing steadily and consistently over time to have a consistent pace of new product innovation. Things like Angled Side, that we introduced, which was a new look and feel and, and even comfort around our Sactionals platform with really big innovation that could be as big or bigger than Sactionals. That's all coming. That's gonna take a little while, but we're already spending money on it and working on it. So when you think about our model this year, we saw a little more deleverage. Top line growth in the category was under pressure.
We outperformed the category, but we felt some of that pressure, and we had some foundational investments to make in systems and in people to catch up with 50%-60% growth in COVID. You've already started to see that pressure abate, right? Gross margin, sorry, SG&A deleverage has dramatically abated over the last couple of quarters, and our guidance for fourth quarter implies another halving of that deleverage. We're passing that. So now it's less about you know, those types of costs and investments, but it's the trade-off between cash flowing to the bottom line and then eventually on to shareholders, with how we stage reinvestment in future sales drivers.
Like Shawn mentioned, we're gonna have a lot more to talk about over the course of this year on that front, as we finalize some of the long-term strategic planning, but we are committed to that, both reinvesting and letting more of the top-line growth flow through to the bottom line.
Great, great. I think we're about up on time. Any closing remarks from, from you, Shawn?
Look, appreciate, we have a lot of investors that have been with us a long time and seen the Lovesac stock come and go and do all sorts of things. In the meantime, I think whatever volatility there is, there's been very little volatility in the performance of the business. I'm really proud of that, really proud of this team. I think it's a team built. It's a team Designed for LLfe, you know? We're, we have a long future ahead of us from our point of view, and it really kinda insulates our thinking and from whatever near-term, you know, macro craziness abounds.
So we'll continue. You can continue to expect kind of the same old Lovesac and a lot of the same kind of performance, even as we press through these headwinds in the home category that are obvious. We look forward to what may be a different year with these rate cuts and everything else. So we'll see. But appreciate the opportunity, and we'll be available, you know, if you wanna grab us in the hallway or whatever.
Great. Thank you so much. Thanks, everybody.
Thank you, Steve.
Thank you.