Greetings. Welcome to the Lovesac third quarter fiscal 2020 earnings conference call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, I'll turn the conference over to Rachel Schacter. Rachel, you may now begin.
Thank you. Good morning, everyone. With me on the call is Shawn Nelson, Chief Executive Officer, Jack Krause, President and Chief Operating Officer, and Donna Dellomo, 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 filing 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 measures. A reconciliation of the most directly comparable GAAP financial measures to such non-GAAP financial measure has been provided as supplemental financial information in our press release. Now I'd like to turn the call over to Shawn Nelson, Chief Executive Officer of The Lovesac Company.
Thanks, Rachel. Good morning, everybody, and thanks for joining us today at Lovesac. I will begin today's call by discussing our third quarter results. After which I'll briefly review our high-level thoughts around our outlook and provide a quick update on our recent new product introductions. Then Jack Krause, our President and COO, will outline the progress we are making toward our key growth initiatives, including results around our amplified marketing programs and shop-in-shop programs. Finally, Donna Dellomo, our CFO, will review our financial results and a few key items related to our outlook in more detail. We are pleased with our third quarter results and some key learnings we've recently gained on the marketing front that give us great confidence in our ability to generate strong sales growth in the pivotal fourth quarter and beyond, which Jack will expound upon later.
Third quarter fiscal 2020 performance includes net sales growth of 25% and total comparable sales growth of 32.5%. This growth was driven by increases in new customers as well as increases in average order value or AOV. Our recent new product introductions, including the Sactionals Power Hub and Storage Seats, have exhibited approximately 45% attachment rates to date and have lifted the blended AOV of all Sactionals purchases, new and repeat, significantly. We continue to make good progress on all strategic priorities, including supply chain optimization, sourcing, growth of the pop-up shop business, and the successful launch of 4 permanent shop-in-shop locations within Macy's stores, intended to be a test toward a larger program.
Our better-than-expected third quarter adjusted EBITDA results, in spite of experiencing slight top-line impact from a timing shift to some new showroom openings, demonstrates our disciplined approach to the management of this business, even while achieving continued high growth. Some of our expected third quarter top-line growth was curtailed by strategic timing delays that have shifted a handful of new showroom openings from the third into the fourth quarter. We will finish the year with 90 total showrooms, which is a 20% increase over last year. We are now past Black Friday and a few weeks into our critical fourth quarter, where we are already experiencing greater than 42% growth versus fourth quarter last year.
While we continue to expect a strong Q4, we are narrowing our full-year sales growth expectations to 40%-42% versus the prior 40%-45% in order to reflect our actual Q3 sales results. Importantly, we still expect to deliver a positive adjusted EBITDA for the full year, even after the pressures put on this business by the special China tariffs, which we have made rapid progress toward mitigating already, as outlined in our previous report. Now for more on Q3. Our total comp increase of 32.5% for the quarter is comprised of a strong showroom comp increase of 27% and significant growth in our internet business of over 48%. Adjusted EBITDA was a loss of $3.7 million for the third quarter, which was less than the loss that we had expected for this time period.
Operationally, we made good progress against our strategic priorities for the third quarter. A few highlights are, number one, we continue to test and learn on the marketing front. Number two, we made strategic investments in our infrastructure to improve the overall customer shopping and delivery experience just in time for holiday sales, which position us for continued success as we scale. Number three, we negotiated significant discounts with our remaining few vendors still producing in China and are already manufacturing the vast majority of Sactionals pieces, which by the way represent 57% of our overall sales, in Vietnam and Malaysia. Number four, we opened four new showrooms and completed no new remodels during the quarter as we continue to increase our physical presence.
Number five, we enjoyed strong results from our pop-up shop business with Costco and successfully opened 4 permanent shop-in-shop locations inside of Macy's stores in L.A., Atlanta, New York City, and Long Island. These locations are operating now as a test that could lead to future expansion. We are pleased with the results even as we make adjustments to hone the operations of this new sales channel in real time. Jack will discuss our third quarter operational progress and expand on the details of these alternative sales channels in just a moment. We are currently holding significant inventory levels of goods that were purchased earlier in our build-up for this holiday season, before the recently established vendor discounts had been negotiated.
Because of this, the full effects of our sourcing work and strong discounts on China-made goods that are meant to offset tariff headwinds will not begin to positively impact our P&L until the end of Q1 next year. We plan to have relocated all of our Sactionals production out of China before the end of next year and manufacture the majority of all other goods, including covers, outside of China by the end of Q4 next year as well. If special tariffs do not abate, we have a path to remove it all. These moves will effectively eliminate our exposure to the special tariffs and also result in lower first costs for these goods, even versus their original cost levels, which you will see start to flow through our P&L with the turnover of the associated inventory throughout next year.
As predicted, we have already seen our overall gross margins decline by approximately 370 basis points year-to-date. We believe that we are through the worst of our gross margin degradation and can expect a slow but steady recovery at the gross margin line beginning in Q1 of next year. This expected recovery will be caused by previously purchased inventory cycling through the register, along with heavily discounted China-made inventory, along with goods manufactured in Vietnam and Malaysia actually being sold and flowing through our P&L as the majority of our cost of goods sold. In terms of product innovation, we are excited by the launch of the new Sactionals Power Hub and Sactionals Storage Seats.
Since the launch of both of these new products just a few weeks ago, we have witnessed 45% of new Sactionals customers including a Power Hub Storage Seat or both in their transactions. The new customers that are purchasing these products demonstrate an AOV, average order value, that is $1,113 higher than those who do not. These two innovations so far are driving AOV higher by $150 across all Sactionals purchases, new and repeat. Sactionals are not just a one-and-done product. Sactionals are a designed-for-life product platform that is meant to grow and evolve with your life, allowing consumers to add to it and upgrade it forever, even in ways they couldn't have imagined when they originally bought the product.
Every Sactionals piece that we have ever sold over these many years already has the receiver hole for the Power Hub embedded in it, just waiting for its addition. Storage Sactional seats can be integrated into existing Sactionals setups purchased many years ago with no special considerations or alterations. We believe that over the long term, this designed for life, reverse-compatible way of doing business will result in customer satisfaction and brand loyalty levels that will be unprecedented in the competitive landscape. Not to mention the platform's unique implications in terms of real sustainability and reduced waste in landfills, which we are passionate about. Numerous aspects surrounding each of these Lovesac inventions are of course patented or patent-pending, and we continue to expand our vast intellectual property portfolio.
We continue to focus on our long-term strategy and feel better than ever about our ability to aggressively gain market share in this giant and sleepy furniture category, even as we prepare to deliver stepwise innovation next year that will greatly expand our total available market opportunity and similarly disrupt yet another category. In the current competitive landscape, it is important to understand how we are different from our industry, the competition, and any kind of comparable, none of which are a very good proxy for what we're doing here. We are a true direct-to-consumer, omni-channel product company that invents things and demonstrates them to our customers in a very personal way. We do not follow a merchandising model. Lovesac has zero low-margin wholesale business. We are not an e-commerce company, a marketplace, or a DTC pure play chasing down rampant growth without regard to cash burn or profitability.
In fact, as we enter the fourth quarter and look forward to delivering another strong year of growth with positive adjusted EBITDA, if you were to add back the regrettably large figure that we have paid in tariffs by this year's end, we would have made significant progress on our original intention to grow adjusted EBITDA meaningfully this year. We view our rapidly expanding retail footprint as a key advantage over the various disruptive high-growth companies that one might compare us to. We are 90 physical locations ahead of most of them and about to go even faster on that front. Our tiny showrooms demonstrate some of the very highest productivity on a four-wall contribution basis of any retailer in any category that we're aware of, and it continues to improve in real time.
While right now we are admittedly reinvesting much of our profits back into infrastructure to prepare for great scale, we are building toward an inflection point where with sufficient systems, staffing, and supply chain efficiency in place, our industry-leading gross margins can produce similarly attractive net margins someday. This is a plan that will require many quarters to unfold, but even as it does, we believe that we can continue to achieve this rapid growth even while making margin improvements at the adjusted EBITDA line beginning next year, regardless of external conditions. In summary, I am very pleased with our progress throughout this quarter. As we look to the pivotal fourth quarter of this year, we will continue to focus on executing against our strategic initiatives and leveraging our distinct competitive advantages to realize the significant growth potential that exists for this company.
Before I turn the call over to Jack, I want to again thank all of our team members for the great job they do day in and day out. Happy holidays to all of the hashtag Lovesac family. Their hard work is driving our rapid growth, and we look forward to building on this performance as we move into the final quarter of this year. I will now turn the call over to Jack, our President and COO, to go over our key priorities for the remainder of this year.
Thank you, Shawn, and good morning, everyone. As you know, marketing is a critical pillar of our growth strategy, given that our brand is still in its infancy, and we're investing to increase brand awareness and drive sales. We continue to test and learn with our marketing, pushing the envelope, being innovative with campaigns, channels, and cadence. As we mentioned on our last call, we had planned to moderate our marketing spend into Q3, and we expected an associated sales deceleration. For the quarter overall, we saw sales growth of 25%, and our comp sales growth was strong at 32.5%. As a reminder, we were up against a difficult comparison last year with the launch of our very first Labor Day national media campaign. On a two-year basis, our Q3 comp growth accelerated from Q2 and was the strongest it has been year to date.
As we look ahead to Q4, we have incorporated marketing learnings in our marketing beyond the traditional furniture buying events, and are pleased with the results of the Q4 revenue growth of over 42% quarter to date, as Shawn mentioned earlier. While we continue to be strategic in terms of timing of our marketing spend and concentrating it in periods where we maximize ROIs, especially during the peak holiday periods, we'll also aggressively expand our marketing efforts outside of these periods, where we see more opportunity to drive brand awareness. We will continue to look at new, efficient marketing strategies to drive the business, and many of the marketing initiatives we have successfully tested so far this year will be leveraged heavily in the fourth quarter.
You'll see this in Q4 as we expand our awareness media outside of our historical patterns and heavy up digital during key periods in order to strengthen conversion. This approach will have a positive impact on our ability to grow as we move beyond the typical furniture buying periods. On the digital side, we're continuing to leverage our digital expertise and technologies as we grow the business. During the third quarter, we launched our mobile app for desktop in October. Since launch, this page, which is designed to mimic the mobile app Sactionals build experience, is in the top 10 highest visited pages on our Lovesac website. Additionally, 70% of the total mobile app downloads occurred in Q3, with the vast majority taking place after the launch of the desktop app.
We're also encouraged to see that sales from the mobile app continue to drive a very strong average order value at over $4,000. Importantly, we have seen very good synergy between our TV media and our digital conversion spends, and we'll lean into higher digital marketing levels in a very agile manner moving forward. Our next strategic growth priority is continuing to make investments in our infrastructure, including technology. These investments are aimed at improving the overall customer shopping experience and will position us for continued success as we scale the business. Tom Lee, our Head of Supply Chain, is focused on various priorities, including, one, building scalable processes to replace the manual processes with automated applications for areas such as order management, planning and replenishment, distribution, and logistics management. Two, improving system integration between supply chain and our carriers, our 3PL distribution centers.
Three, reducing the cost per mile with planned addition of 2 more distribution centers in fiscal 2021, with one on the East Coast and the other on the West Coast. Four, continuing to transition China-sourced product to Vietnam and Malaysia for covers and liners, which Shawn discussed earlier. We'll continue to keep you updated on the progress of each of these 4 priorities. Next, expanding and improving our showroom presence. We opened 4 new showrooms in the quarter, ending the quarter with a total of 84 showrooms, with 73 locations now in the current rebranded design. We remain on track to open 17 new showrooms, netting 15 for the year in fiscal 2020, with 7 of those openings being planned in Q4 alone.
As Shawn mentioned earlier, we did see some timing delays of showroom openings in Q3, but we look forward to completing our openings for the year in the coming weeks and benefiting from our expanded presence from both a sales and brand awareness perspective. As a reminder, the economics of our new showrooms are very favorable, with pre-opening investments of approximately $350,000 per location, which includes floor model inventory, CapEx, and all pre-opening expenses, and the average payback of our showroom investments being under two years. As we look to next year, our showroom openings will continue to accelerate, and our shop-in-shop partners will expand. To support this growth, we're excited to announce the appointment of Clary Groen as VP of Real Estate.
Clary will lead the real estate strategy evolution, the selection process as we continue to grow our showroom, pop-up, shop-in-shop footprint, and expand the Lovesac brand. Clary's previous experience in various retail real estate roles, such as 4Site Advisors, Bluemercury, and Francesca's, just to name a few, makes him a great addition to our team, and we're looking forward to seeing the benefits from his expertise. The creation of this new position demonstrates our focus and commitment to making the necessary infrastructure and talent investments to support the significant growth that lies ahead for Lovesac. Turning to our pop-up shops.
In the third quarter of fiscal 2020, we operated 192 pop-up shops with Costco, up from 155 in the third quarter of last year, which drove a significant increase in our other channel sales to $8.2 million from $5.9 million. Pop-up shop productivity increased 7.5% in the quarter, has been a contributor to our growth in the past 24 months. In October, we also ran an 18-day event on costco.com, providing Lovesac with nationwide coverage that was very successful. We have scheduled an additional online event that will take place before year-end.
We continue to value our strong and progressing relationship with Costco, as our pop-up shops and online roadshow events allow us to capitalize on the customer acquisition opportunities in high-traffic locations, including both their brick-and-mortar locations and their websites, which provide us the opportunity to showcase a limited offering of our products to customers who may not know our brand and our unique product attributes. As we continue to leverage this model and establish additional reach for the Lovesac brand, we launched our Macy's shop-in-shop pilot in four locations during the quarter. These four shop-in-shops are permanent asset-light locations in key Macy's stores carrying the same digital technology of our showrooms and are staffed by Lovesac employees under the direct supervision of our sales operations teams.
While still early, we're very pleased with the initial results and positive customer response as new customers enjoy the live Sactionals demo that, as experience has taught us, leads us to increased adoption of the Sactionals platform. Preliminary data shows that at the Macy's locations, we are acquiring significant number of new customers. The plan remains to test these four initial locations for at least a full year prior to expansion, and we will continue to update you on the test details, performance, and potential expansion plans as that information becomes available. In addition, we're continuing to explore shop-in-shop format with other retailers, given the positive results we have seen thus far, and our expectations for margin rate and contribution to be similar to our freestanding showrooms as we go forward, but with less than a third of our CapEx investment.
In summary, we're very pleased with all the operational progress we've made in Q3. As we look to the final quarter of the year, by far most important from a sales volume and profit generation perspective, we have a strong start, and we feel great about our positioning and marketing plans heading into the peak volume weeks. We will remain focused on disciplined execution of our growth strategies to help drive market share gains and realize the significant opportunity we see in our brand. With that, for a more detailed review of our third quarter results, as well as a few items related to outlook, I will now turn the call over to Donna Dellomo, our Chief Financial Officer.
Thank you, Jack. Good morning, everyone. I will begin my remarks with a review of our third quarter results, and then provide some commentary around our thoughts for fiscal 2020. Net sales increased 25% to $52.1 million from $41.7 million in the prior year quarter. This sales growth was driven by strong showroom, internet, pop-up shop performance, as well as new shop-in-shop test locations. We saw growth in transactions as well as ticket, resulting from successful digital marketing strategies, which drew new customers to the brand while also driving repeat purchase behavior. An increase in the number of showrooms also helped fuel our Q3 sales performance. Total comparable sales, which includes showroom and internet sales, increased 32.5%. Comparable showroom sales increased 27.1% and represents our 12th consecutive quarter of positive comp showroom sales increases.
We opened 4 new showrooms, which is 9% year-over-year growth, and ended the quarter with 84 showrooms. As Jack mentioned, we are on plan to open 17 showrooms for the year, with 7 showroom openings falling in the fourth quarter. Looking at our results by channel for the third quarter, showroom sales increased 15.8% to $32.5 million, internet sales increased 47.7% to $11.4 million, and our other channel sales, which includes our pop-up shops in Costco locations and shop-in-shops in 4 Macy's test locations, increased $2.3 million to $8.2 million for the quarter. By product category, our Sactional sales increased 26.3%, our Sac sales increased 17.9%, and our other category sales, which includes decorative pillows, blankets, and other accessories, increased 25.7%.
Gross profit dollars increased 14.7% to $26.3 million in the third quarter. As expected, gross margin percentage decreased by 450 basis points to 50.4% from 54.9% reported in the same period last year. This year-over-year decline was primarily driven by the 25% tariff impact, partially offset by reduced costs of our Sactionals and Sac products, primarily related to cost savings from a change in the sourcing of our Lovesac and Down Blend fills and an ongoing shift in manufacturing to Vietnam and other countries outside of China. As a reminder, it is the timing of our tariff mitigation efforts that is causing this temporary gross margin pressure.
As Shawn said, we fully expect to completely mitigate the impact of tariffs through the work we are doing on the sourcing front, as well as collaboration with our vendors by the end of fiscal 2021. For the third quarter, total SG&A, excluding advertising and marketing expense, increased 26.7% to $25.5 million from $19.3 million in the third quarter of last year. Excluding approximately $174,000 of other non-recurring expenses related to financing fees associated with our primary and secondary offerings and board and executive recruitment fees, total SG&A increased to $24.3 million. The increase in SG&A was driven largely by increases in infrastructure improvements, insurance costs, and increased employment costs, partially offset by decreases in various selling-related expenses.
Our investments in advertising and marketing, which benefit extended periods, increased $2.1 million or 40.5% over the third quarter of prior year. As a percent of sales, advertising and marketing expenses increased approximately 150 basis points to 13.9% this quarter, largely due to an introduction of additional media involving Veterans Day. Depreciation and amortization increased $300,000 from the prior year period to $1.4 million, principally related to capital investments for new and remodeled showrooms. In the third quarter of fiscal 2020, the operating loss was $6.9 million compared to an operating loss of $2.7 million in the third quarter of last year.
In the third quarter of fiscal 2020, adjusted operating loss was $6.8 million, excluding approximately $76,000 of non-recurring expenses related to financing fees associated with our primary and secondary offering. In the third quarter of fiscal 2019, adjusted operating loss was $2.2 million, excluding approximately $440,000 of non-recurring expenses related to financing initiatives, our secondary and primary IPO-related fees. Our net interest income for the third quarter was $134,000, which reflects the impact of our IPO and other primary share financing. Tax expense in the third quarter of fiscal 2020 and 2019 was not material and was related to minimum state income tax liabilities.
Before we turn our attention to net income, net income per share and EBITDA, I would like to point out that my discussion of these metrics will focus on net income and net income per share adjusted for the IPO and other financing costs, as well as adjusted EBITDA. Please refer to the terminology and reconciliation between each of our adjusted metrics and their most directly comparable GAAP measurements in our earnings release issued earlier today. Adjusted net loss was $6.7 million or $0.46 per share in the third quarter of fiscal 2020, compared to an adjusted net loss of $2 million or $0.15 per share in the third quarter of fiscal 2019. Adjusted EBITDA was a loss of $3.7 million as compared to a loss of $400,000 in the third quarter of last year.
Turning to our balance sheet, we ended the quarter with $27.9 million in cash and cash equivalents. Ending inventory increased 104% year-over-year, driven by higher sales, increase in capitalized freight costs relating to tariffs, as well as an increased investment in the weeks of supply of the inventory on hand to support sales growth across all channels to be agile enough to support the success of our advertising and marketing investments. As well as an increase in capitalized freight and warehousing costs relative to the build in inventory and tariff charges. Now, I would like to discuss a few items as it relates to our fiscal 2020 outlook.
From a showroom perspective to the full fiscal year 2020, we are on track to open 17 new showrooms this year with 7 showroom openings planned for Q4, and we continue to expect to remodel 8 showrooms. As a reminder, we are now referring to our Costco roadshows as pop-up shops and our Macy's pilot as shop in shops, given the nature of the shop setup. For fiscal 2020, we will operate a total of 4 Costco inline roadshows, 3 of which happened in the third quarter. In addition to our in-store pop-up shops with Costco, as well as 4 test shop in shop locations with Macy's, which were launched in the third quarter. We expect to deliver strong levels of sales growth between 40%-42% in fiscal 2020, which implies Q4 revenue growth at or above the high end of this annual range.
As Sean discussed, we have seen greater than 42% revenue growth in the fourth quarter to date. Combined with our 7 showroom openings in Q4 or 21% showroom growth, expected cadence and impact of our marketing investments and our expectations for our pop-up shop initiatives, we are well positioned for the fourth quarter. Given the significant tariff mitigation process we've made, we continue to expect to generate positive adjusted EBITDA for fiscal 2020. We expect full year gross margins for fiscal 2020 to be approximately 370 basis points lower than fiscal 2019, principally related to the following. The first being expected tariff pressure, which is being partially offset this year by mitigation actions and SG&A initiatives. Investments into our distribution infrastructure to support future growth.
A slight headwind due to the continued shift in product mix towards Sactionals, as well as a slight impact from higher pop-up shop channel mix sales. These decreases are partially offset by product margin gains relating to changes in discounting of promotional strategies, reduced product costs related to vendor sourcing strategy, and negotiated discounts with vendors in China to mitigate tariff pressures, as well as an accelerated shift of sourcing outside of China. In terms of SG&A, excluding advertising and marketing expense, as previously mentioned, we continue to expect the most significant SG&A leverage to be generated in the fourth quarter given the seasonality of our business.
As a reminder, embedded in our SG&A outlook is all of the investments we are making in the business across people, process, and infrastructure, and our Q4 net sales volumes enable us to produce the greatest amount of leverage on these investments over the prior year. Finally, as it relates to capital expenditures, we now expect to incur approximately $10.5 million of CapEx in fiscal 2020 versus our prior guidance of approximately $11.5 million due to a timing shift of investments of Sac manufacturing CapEx to fiscal 2021. The vast majority of our CapEx this year is being spent on the opening of 17 showrooms, the remodel of approximately 8 legacy stores, the opening of 4 Macy's shop in shop pilot locations, and approximately $300,000 being invested into the Sac manufacturing facility this year.
The remaining spend is being allocated to technology in our showrooms, inventory management and logistics systems, e-commerce platform enhancements, and for headquarters data and support systems. For all other details related to our results, please refer to our earnings press release. With that, we would now like to turn the call back to the operator who can open it up for questions. Operator?
Thank you. At this time, we'll be conducting a question and answer session. 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 two if you'd like to remove your question from the queue. For participants who are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Thank you. Our first question is from the line of Brian Nagel with Oppenheimer & Co. Please proceed with your questions.
Hi, good morning.
Good morning.
Thank you for taking my questions. The first question I want to ask, this with regard to sales growth, and I know there's a lot of moving pieces here. In the fiscal third quarter, you know, as you discussed, with the 25% sales growth. That was down from something in the mid-40s in the second quarter, and then so far in the fourth quarter, it's popped, you know, sales growth's improved back to 40%. Could you help me understand better just the rank order factors that sort of say created that divot, if you will, in sales growth in the third quarter? We recognize that the comparison got more difficult.
Yeah, this is Jack. I'll handle that. I think one of the key insights to look at that is if you look at something we haven't seen in a couple of quarters based on cadence, is the fact that our overall comps, for example, in showrooms were greater than our showroom growth. Basically, we had a pullback lever on non-comp perspective of the business versus a year ago, and that really is tied to those showrooms that shifted back approximately. You know, we had 7 showrooms that shifted between the third and fourth quarter in one shape or another.
Okay. Is there a way to Jack, I mean, not to push you hard on this, but could you look at your math and say if you didn't have that shift in openings from Q3 to Q4, what Q3 sales growth would have looked like?
I mean, Donna, I don't know if you wanna take a stab at that, what we think the impact was, the one time impact.
I can, but let me also note that we were originally predicting our growth in the third quarter to be a little less than it was in the second quarter due to the things that Jack mentioned, and also the growth of the pop-up shop business year over year. If you go back to what we had said in the second quarter call, on the second quarter call, we had predicted to take a dip in the third quarter relative to that as well. You know, we're anniversarying the media, the growth in our shop in shops or pop-up shops year over year because we have significant growth last fiscal. We're a little lower in the third quarter of this year.
The sales, we're probably looking at that shift in sales for the new showrooms opening probably to be approximately $2 million, which, because we weren't able to open originally as planned in the third quarter, it's probably about a $2 million impact on the top line.
It's important, Brian, to say if you look at, again, back to the two-year, you know, I like to look at two-year stacks. Q3, the two-year stack was the highest it's been year to date at 83%.
Oh.
We expect Q4 to be the highest of the year. I think we're going over tougher comparables. The two-year stacks are continuing to be very strong.
Got it. That's helpful. Then another question with regard to sales. You talked about the nice performance so far here in fiscal Q4. As the calendar goes, we're I guess about halfway through the quarter. Just can you remind us where, you know, given the lumpiness of the holidays in the fourth quarter, how much of the Q4 business has probably been transacted so far?
Wow. On a week-to-week basis, that changes pretty quickly, Donna. I'm not sure if you can, if you have that. It's probably. I'd say we still have a good at least 50% of the quarter to go. Is that correct, Donna?
Yeah. Let me give me a second. I'm just gonna check that.
Yeah. I mean, I think one thing, just to build on that while she's looking at the number is coming out. I think it's really important to note that, while we intentionally pulled back on the Labor Day marketing or media really, because we saw an opportunity to really be a little bit more distinct between our awareness media and our conversion media, we think we're in a really nice place, especially with the wackiness around, you know, the Q4 and the shifts to just be on media full-time, and then just aggressively go with conversion digital media at the sort of the classic furniture buying period. It gives us a real opportunity to expand our awareness to basically an always on basis.
Jack Krause just confirmed, yeah, we're right at around 50% at this point of Q4's volume.
Let me also ask one more, then I'll deal with someone else. Congratulations on, you know, so quickly shifting the supply chain. What I heard you say is that as far as the tariff impact, we probably just saw bottom. The impact, let me say it better. The impact on gross margin, we just saw bottom. Is it still the assumption that as the supply chain initiatives take hold, that Lovesoft will essentially get back everything it's lost in gross margin as a result of tariffs over the next, you know, several quarters or so?
I'll cover that, and then I'll hand it, I think, to Donna and Sean. As a large base, we certainly are at the lowest level, I'd say, of margin, and we'll continue to leverage in our margin. It's also important to note that everything we gain from margin improvements won't go back to building pure profitability in the short run because we have about 18 months where we've laid out a lot of infrastructure commitments, building showrooms, building a better WMS, et cetera. While we will gain significantly at the margin level, we'll leverage significantly in the next 18 months, we're not going to aim to push 100% of that into EBITDA because we're really just trying to build the base for the company being a billion-dollar company in the next couple years.
Oh, go ahead, Sean.
You go.
To Jack's point, that's definitely something to keep into consideration. As far as tariffs, just as a reminder, we do maintain 12-14 weeks of supply of inventory. As we're shifting out of China into Vietnam, we still do have inventory that's been impacted by the tariffs that we'll be selling through. We'll continue to see some impact, a lesser and lesser impact as we sell through that inventory. There still will be a part of our inventory specifically related to fabrics that we're working to move out of China. There is still, although the smaller part of our inventory, we will still have a piece throughout this year that has a tariff impact. We will still start to.
We will still see some tariff impact this year, although significantly less than last year. There will be initiatives next year related to supply chain and distribution that will impact the gross margin line. We're not expected to recoup 100% of the tariff impact, but we do, we absolutely do expect to see our gross margin line start to accelerate next year and in the years going out.
Yeah, just one last comment on that. I think that the one, you know, short answer to your question, Brian, is yes, we will see gross margins recover fully as we view it, but not overnight and not even in the next four quarters fully. It's not the tariff issue alone. It's our investments into supply chain that are happening and need to happen to really, you know, get this business as scalable as we'd like it to be, because we foresee high growth for a very long time. We are investing heavily in that. It'll just be a long, protracted recovery, you know, over, I won't give you a number of quarters, but more than four quarters that we will absolutely.
We believe we have a direct path to absolutely get it back to where we'd like it to be in gross margin.
Appreciate all the color. Best of luck for the balance of the year. Thank you.
Thank you.
Our next question is from the line of Thomas Forte with D.A. Davidson. Please proceed with your questions.
Great. Thanks. I had two questions. First, I wanted to talk about your ability to opportunistically get higher quality real estate locations for your new showrooms in today's retail environment. Anecdotally in Fairfield County, I've seen some new excellent locations in both Greenwich and Westport. Second, I'd like to give you the opportunity, given that I get a lot of questions on this, to talk about Macy's. Macy's, as a retailer, seems to have a number of challenges, but can you remind us why you think Macy's is a great partner for your shop at shop efforts? Thanks.
Okay. I'll just answer that in order. I think, Tom, from a perspective of real estate, you're absolutely right on. I think one of the things that having a very balanced business approach in terms of being omnichannel, being digital, having showrooms allows us and having a fair amount of marketing behind us is giving us new choices. You certainly have seen off mall locations as well as lifestyle center locations pop up. We'll continue to be significantly more diverse in the future as we look at our opportunities and we look at the investment in media relative to the investment in various levels of real estate as really shifts between customer acquisition approaches.
Net-net, I think you'll see us more in off mall in the long run as we've seen the ability to open street locations very quickly based on our media, and that gives us a lot of power in terms of negotiation. I think we'll see a considerable diversity in the future as well as an ability to leverage our real estate costs. The second one, the second question was about Macy's. Yeah. I think the one thing to think about Macy's, they certainly have a lot of problems. It's sort of like the you know the end of the retail world and the retail apocalypse. Macy's certainly has their own challenges, but they're a pretty large company still, and they have a very large percentage of the overall furniture market in the U.S.
In fact, they're one of the largest, furniture retailers, and they have a significant, shared, sort of, customer base that shares some of the values of ours, especially in some of their more premium locations. I think, we have a huge opportunity to learn, where the biggest opportunities are, how their real estate works with ours, and how to leverage each other in order to create a low CapEx, win-win, high brand awareness model. A lot of opportunities. It is a test, and as soon as we have more insights, we'll keep you posted. There's a lot of people shopping at Macy's, and the company's gonna be around for a while, and we're gonna try to see if we can leverage off of each other.
Thank you, Jack.
Our next question is from the line of Maria Ripps with Canaccord Genuity. Please proceed with your question.
Good morning, thanks for taking my question. Could you share maybe any additional color around your commentary of greater than 42% revenue growth so far this quarter, given that your guidance implies 42%-47% growth in Q4? I have a follow-up.
Donna, you wanna start that or.
Yeah. Can you just repeat that one more time? I'm sorry.
Yeah. I was just asking whether you could maybe share some additional color around your commentary of greater than 42% revenue growth so far in the quarter because I think your guidance implies 42%-47% growth range in Q4.
Well, we didn't give Q4 guidance. Our guidance is saying 40%-42% for the year. Does that make it clearer?
Oh, yeah.
So it-
Shawn mentioned 42% quarter to date. I think that's
Yeah.
I mean, I really think what we were trying to say is we don't wanna give guidance for the rest of the year, which, I mean, it's getting pretty close to giving it, right, as we speak. The bottom line is, I think the point is, coming out of the Labor Day period and looking at our new marketing strategies that are not as based or focused as much on these big furniture events or these big sale events, such as Labor Day or Black Friday, has really allowed us to create a new baseline outside of those periods, which is giving us a 42% growth quarter to date, and makes us feel confident about the business strategy going forward.
Right. The only other thing we did say as far as, for the fourth quarter, that we did feel that the fourth quarter would come in at or above the high end of the range of the 42%.
Got it.
Yeah.
Uh.
We have said too that the fourth quarter stack comps will be the highest of the year.
Got it. Maybe on your advertising efforts. As your brand awareness increases, are you seeing any changes in the type of buyers you're attracting to the platform, either from a sort of demographic standpoint or their stickiness with the platform? Also, how are you thinking about sort of stronger brand awareness driving higher repeat rate over time?
Good question. In terms of we are seeing. What I'll do is say we are seeing some things that change, and I'll probably defer most of that answer to our Q4 results as we talk about sort of the overall view of the year for customer acquisition and a look at the customer. We're certainly seeing a broadening of customer appeal across larger sets of age groups. We do see, along with the young millennials, we're seeing what we call the silver foxes coming in and buying at significantly higher levels as well. We're seeing a really an expansion generationally in the interest, and I think that's clearly directed based on the TV awareness campaign that we've used in the last year or so.
To follow up, what was your next question?
That was it.
Okay.
Follow-up question.
All right.
You answered it. Thank you so much.
Oh, and the AOV. Yes, we're continuing. That's a good point because I did wanna. We're continuing to see increased AOV, and we're very, I think we're very positive on that, and it's not through promotion. I think it's really critical to say we're gonna see growth through repeat purchases, through our new products. We're already seeing a really nice attachment rate, driven by both new customers and also our embedded customer group in terms of the Storage Seat and the Power Hub. They will continue to grow in terms of impact on the business in the out years. We're very excited about what we're seeing in terms of the platform.
You know, Shawn's discussion of the platform historically, that's not a product, it's a platform, and the benefits of it, we're clearly seeing that in the third quarter, and we expect to see going forward in terms of very high attachment rates and seeing immediate impacts on AOV with those customers trading up.
I'll add, Maria, because you had mentioned the notion of future business being driven, you know, by word of mouth and by, you know, the context that we can't forget is that Lovesoft has less than 2% brand awareness. Sactionals are a very unique invention that masquerades as a couch, but it's quite unique in the landscape. There's nothing like it. As Sactionals catch on someday, you know, beyond our forcing it through the funnel with advertising, as they become popular, right, business has a tremendous opportunity to enjoy a tailwind that just comes from brand awareness that we don't have yet. We often overlook mentioning that because, you know, it's impossible to plan.
It's undeniable that the competitors who we sell couches against, many of them have significant brand awareness that drives those business with very little advertising. We will achieve that as the further we expand this brand. That's just impossible to plan out, but that's something we very much expect.
Yeah, I think to build on that, I think it's funny, we are asked a lot of questions about increasing levels of marketing, et cetera, and how does that work in the long run. I think one thing to for everybody to keep in mind is because we have a strong showroom business as well as a DTC business outside of showrooms, we're really in a fortunate position. To put it in perspective, this year alone, even with the significant increases in TV advertising, our number one source of new customer acquisition is showrooms. That tells us two things. We have a long runway to acquire customers just with showroom growth. Number two, every time we open a showroom, we get a 2% increase in our ROI on marketing.
There's a real virtuous circle there that will continue to help us drive efficiency in marketing that probably isn't as obvious externally right now, but we'll see huge advantages in the next 24 months.
Great. Thank you so much.
Our next question is from the line of Dave King with Roth Capital. We'll just hear your two questions.
Thanks. Good morning, everyone.
Hey, Dave.
First on the 40%+ growth implied for Q4, how much of that is transaction versus AOV growth? Then how much are you planning to grow marketing to get that revenue?
Yeah, I can tell you a couple things. If you look at our, I'll give you our year-over-year marketing from the last three years. Year-over-year ending last year, our marketing grew from $9 million to $18 million, so that was 100% year-over-year. This year, we're going from $18 million to $30 million, so it's approximately 60% growth year-over-year. We have growth that's higher than our marketing spend growth right now is at a higher rate than our total top line growth. However, as you can see through those numbers, the rate of increase is decreasing, and we expect to see that continue to decrease. We do see an endpoint where we get the efficiencies.
We will see an increase approximately. I'd say it's gonna be about 50%-60% in marketing increase in the quarter over last year, and we'll see very strong growth.
On the transaction versus AOV, do you have what-
Yeah, I can't.
Total like
I don't wanna give you the details and the numbers in terms of go forward because now we're splitting a quarter. I can tell you for year to date, we'll be about roughly in the mid-teens in transactions increases and approximately 20% in AOV.
Yeah. Okay, that helps. As a follow-up on the marketing front, how are the ROIs and, you know, the efficiencies on the marketing these days? Are the TV ads still performing to your liking? You know, what's working? Is there anything that isn't working? Just some color there I think would be helpful. Thank you.
Yeah. I think right now ROIs have been relatively stable. We're not seeing a decrease or necessarily an increase. I think there's two sets of, you know, headwinds in pricing and competition in terms of cost, and there's tailwinds in terms of building out our showrooms. We expect as we go forward for the next 12 months to be looking at pretty stable ROIs based on different combinations. We expect so, Dave, and also I would say we're roughly spending this year at the 12% of marketing, 12% of net sales. That will possibly go up just a little bit, but we'll talk about that in the future.
We don't see any dramatic changes in terms of the rates of marketing will not increase faster than the rate of sales in terms of the future as we go forward.
Okay. On the ROIs, are those, you know, them being stable, are those still consistent with sort of the numbers you laid out, I think around the timing of the IPO in terms of-
Yeah, we're very pleased. To put it into more detail, I think the subtlety there is that I think if you look at the market right now, just about everybody is advertising around those big furniture periods, right? So they're mostly digitally advertising or the classic furniture companies are promoting, you know, $1,000 off, et cetera. Our marketing, our awareness or our branded advertising has no promotional mention in it, and it's not promotional advertising at all. So what we're really talking about is a distinction between creating brand awareness, which we believe is absolutely critical in the long run, and creating a more efficient way to create brand awareness and separating that activity from the conversion activity that is really around those key furniture buying periods and driven by digital.
We will certainly continue to heavily invest in our digital around those periods, but what we're finding is that by creating brand awareness where there's less promotional noise, we can get some pretty high ROIs year-round. In fact, it makes us feel really good about next year because instead of focusing all of our media and our analysis on 14-18 weeks, we're looking at 52 weeks and looking at really being subtle about how we manage our our brand building aspect of our business relative to our conversion or our promotional aspect of the business. That's why it's hard to understand what we're saying and our excitement is. I think as we roll out for next year and we talk about our annual plans, it'll be a lot clearer.
We're seeing an always on opportunity in brand awareness, which allows us to really manage costs and manage around the competition in ways they can't because they're so promotionally dependent.
Okay, that's very helpful. Thanks for taking the questions, and good luck with the rest of the year.
Thank you.
Thank you. The next question is from the line of Alex Fuhrman with Lucid Capital Markets. Please proceed with your question.
Great. Thanks very much for taking my question. You know, wanted to ask about the attach rate on the Power Hub and the Storage Seat that you're seeing. Those were certainly very impressive numbers. Can you give us a sense of, you know, when that really started to pick up and have you been marketing pretty aggressively to former customers to get them to come back in and get the Power Hub? Just curious, you know, how long we should be, you know, expect to see that lift in average order value.
Good question. I would expect we have not really been spending. I would say we haven't been doing an over-aggressive marketing program with those items. We certainly market to our installed customer base, obviously via direct mail and catalogs, et cetera, so they'll be aware of it. We don't see any reason for that attachment rate at this point to go down. Now, it's very early, based on what we're seeing, we expect to build that into the business model for the next year.
Okay. That's really helpful. Thanks. Then if I could just ask a question on the mechanics of the Q3 numbers here. Comparable showroom sales were up, you know, very nicely close to 30%, which was more than the increase in showroom revenue. Can you give us just a you know, kind of the summary on how comp store sales have been higher than showroom revenue for this quarter? Is this just the timing of when stores have entered the comp base or something like that?
Exactly. It's all comp-based. It is absolutely 100% driven by timing of the comp base. Obviously we have, as we look at our new showroom opening run rates, they're as strong as they've ever been. We're extremely excited about, especially some of our new off-mall openings having extremely high run rates. It's primarily a shift.
Okay. Thank you very much.
Thank you. We have reached the end of the question and answer session. I'll now turn the call over to management for closing remarks.
Shawn, you wanna take this one?
Yes. Thanks so much for joining us today, and we appreciate all of the great questions. Once again, thanks to all the Lovesac family for your hard work, and we are very excited about fourth quarter and moving into next year and continued growth. Thank you.
Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.