Greetings, and welcome to the Lovesac second quarter fiscal 2021 earnings conference call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. If you would like to ask a question, you may press star one on your telephone keypad during today's presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Rachel Schacter of ICR. Thank you. Please go ahead.
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 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 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.
Good morning, everyone, and thank you for joining us today. I will begin my remarks by providing an overview of our continued response to a dynamic operating environment, followed by a summary of our performance for the second quarter. Then Jack Krause, our President and COO, will discuss our fiscal second quarter operational performance and progress being made on our key initiatives against the current backdrop. Donna Dellomo, our CFO, will then review our financial results and a few other items relating to our fiscal 2021 outlook. While the operating environment in the second quarter continued to be challenging, I am very pleased with our team's resiliency and ability to adapt as we continue to serve our customers.
During the quarter, we began reopening showrooms through a measured and phased approach with our e-commerce platform continuing to serve as an important first step in the customer's transaction path, and in many cases, serving as the platform for their Lovesac purchase experience from start to finish. We ended the quarter with all showrooms open in some format, many still virtual or by appointment only, as we continue to prioritize the health and safety of our associates and customers and utilize our full-time associates as trade area representatives by also leveraging our enhanced technology capabilities. In terms of our shop in shops with Macy's and Best Buy, five of our seven were open as of the end of the quarter, and the remaining two reopened in August post-quarter end.
We operated only 19 Costco in-store pop-up shops in Q2 as compared with 209 in the prior year period, as Jack and Donna will discuss shortly. The strength in customer demand for our changeable, flexible, sustainable, upgradable, and shippable designed for life, sectional seats and sides, combined with our ability to successfully adapt to the changing operating environment, including a very strong Heroes campaign, all drove the 28.7% overall Q2 sales increase, including 387% e-commerce growth. Our Heroes campaign, which honored first responders and frontline workers, was very successful, attracting new customers to our brand while driving over half of our sales during the period in which it ran from April 3rd, 2020 to May 31st, 2020, with redemption lingering into early June 2020 and impacting a little over one month of fiscal Q2.
We are pleased to see strength in the business even post the end of this campaign. In an effort to appropriately manage the business in this uncertain environment, we tightly managed inventory purchases and expenses, and we were conservative with marketing and promotions in Q2 as we continued to successfully navigate the pandemic disruption and ensure a healthy financial position. Our operational discipline, coupled with some benefit from the timing of expenses, helped drive an almost 28% increase in gross profit dollars and a positive adjusted EBITDA of $2 million. This also marked the first time that Lovesac has achieved a positive adjusted EBITDA in a fiscal quarter other than Q4 as our business overall continues to mature toward cash flow positivity. With tight working capital management and disciplined capital expenditures, we ended the quarter in a strong cash position of almost $55 million.
The end of this pandemic is not yet in sight, and the nesting behavior has created an almost unprecedented demand for home-related products and solutions, particularly for products like ours that can be easily configured and shopped online and delivered quickly in a touchless way via FedEx. Further, our unique commitment to sustainability, combined with the quality of our product offering and the ease of fulfillment, remain important differentiators and key drivers of customer purchase decisions. We are leaning into these differentiators and highlighting them even more in our go-to-market strategy. Specifically, the success we've seen from utilizing our full-time showroom employees to manage a trade area versus just a showroom has proven very successful, especially when combined with technology enhancements such as Podium chat systems and our recently re-platformed enhanced website with new capabilities that Jack will discuss in just a moment.
We expect all of these important distinguishing attributes to even better position us to capitalize on the subsequent market share opportunity going forward. As we execute in the near term and navigate this very dynamic operating environment, we are advancing the initiatives that underpin our long-term growth strategy. To that end, we continue to make strategic investments in our infrastructure that will support our growth while also creating efficiencies and elevating the customer experience. We are very excited that the August launch of our completely new e-commerce platform went very smoothly, even amidst such rapid growth. This new platform has several improved capabilities to highlight the uniqueness of our product offering while allowing us to more rapidly advance our plans of improving the seamless omni-channel experience for the customer.
On the supply chain side, we continue to plan for the opening of our East Coast warehouse late this fiscal year, which is expected to help drive reductions in freight costs in fiscal 2022 and beyond. From a product development perspective, we remain keenly focused in the nearer term on delivering a new product innovation that will be additive to the Sactionals platform. We still anticipate the launch of our previously- discussed Sactionals platform technology innovation early in our next fiscal year. Moving to our current performance, we are fresh off a very strong Labor Day period where we've turned back on the marketing machine that we had let coast for a bit in order to avoid any inventory challenges in the wake of early COVID caution on inventory levels. We feel well-positioned now for the second half of the year.
Our inventory flow has ramped back up, and we are again making the investment in infrastructure and bringing back expenses that had been temporarily halted or reduced, particularly on the marketing front, to drive even more growth. We remain agile as we navigate this environment and relentlessly continue to test and learn on the marketing front, innovate on the product front, and elevate the omni-channel customer experience to seek increased share of this gigantic upholstered furniture category, of which we still have less than 2% penetration. We look to the remainder of this year, we feel confident about our ability to drive strong year-on-year growth, but we recognize that the environment remains uncertain. We will continue to be nimble and flexible, and we will remain disciplined in our approach to running the business.
As we think about the back half of the year, we are currently planning to open 7-10 more showrooms, but at this point expect no contribution from Costco in-store road shows, as Jack and Donna will discuss further. We expect continued sales strength in Q3, not dissimilar to the sales growth we delivered in Q2, and with costs coming back into the business and marketing turned back on, we currently expect adjusted EBITDA pressure in Q3 before returning to healthy profitability and growth of the adjusted EBITDA line in the seasonally high volume fourth quarter. Of course, we will remain adaptable, opportunistic, and net returns-focused as we grow our brand and further strengthen our omni-channel customer experience. In summary, I am thrilled with the execution of the team to date and how we have navigated the rapidly evolving backdrop.
We have a strong balance sheet and financial position, an offering that resonates especially well during this time, an agile and lean operating model that includes a flexible marketing budget and a diversified sales channel to help expand the reach of our brand. Before turning the call over to Jack, I wanna thank all of our associates for their hard work and dedication to our customers during these challenging times. With that, I'll turn the call over to Jack to provide you an operational update and discuss the progress being made on our key strategic priorities.
Thank you, Shawn, and good morning, everyone. I'll begin my remarks by elaborating on our continued approach to managing the COVID-19 pandemic, and then I'll briefly discuss our plans for the remainder of fiscal 2021. Throughout the second quarter, we remained nimble and agile, prioritizing the health and safety of our team members and customers. The successful operational pivot we discussed at length last quarter continued to serve us well as we reopened showrooms, in many cases in a very limited capacity, and our disciplined management of expenses, working capital, and capital expenditures all reinforced our financial resilience. The healthy demand environment and our execution is evident in our top-line growth of 28.7% during the quarter and our new customer metrics. We attracted 50% more customers than last year and had an almost 70% increase in Sactionals platform new customers.
Let me start with an update on our showroom operations. We launched a phased approach to reopening showrooms beginning in mid-May. With the safety of our customers and our employees in mind, we implemented three unique showroom operating models: virtual, appointment, and walk-in. These three operating models allowed us to safely reopen in many trade areas while providing the continued ability to easily flex between models as pandemic conditions worsened or improved. Currently, all of our Sacs brick-and-mortar showrooms, as well as seven shop-in-shops with Macy's and Best Buy, are open in one of these three phases. During the period of time where showrooms were temporarily closed, we've learned a great deal about how the lovesac.com customer engages with our showroom teams, and as a result, we have leaned into offering this type of sales and service as part of our go-forward strategy.
As mentioned in our quarter one earnings call, the Podium platform continues to be a successful tool for our associates to engage with our customers online. With the expansion of this approach, we have seen a dramatic improvement in wait times. We have also seen a significant number of customers connect with us through this platform to date and are converting at higher levels than we have previously seen in showrooms or online. These are customers that would not have been able to interact with a salesperson on our website prior to this Podium launch and expansion. We also now know that the Sactionals demo is an essential part of our selling process, so we have continued to use Facebook Live to reach a much larger audience with strong increases in live broadcasts and viewership in the second quarter.
In terms of our staffing model and associate utilization, in the second quarter, we continued to make strides in aligning our selling and service teams to provide one seamless experience for the customer. This strategy provides us with the ability to flex our people resources to meet the customer either digitally, on phone, or in the showroom, or wherever the customer is on their shopping journey. In the last 10 weeks since expanding this initiative, we have seen double-digit increases in internal service metrics, such as accessibility, as well as significantly reducing the average wait time for a customer to speak to an agent. We are very proud of how nimble our sales and service teams have been throughout this time.
Even as we have navigated the rapidly changing operating conditions of the last few months, we remain focused on advancing our key strategic priorities to drive the long-term growth and market share gains as well as the effective scaling of this business. These priorities are, one, product innovation, two, efficient marketing and promotion strategies, three, new showroom growth, four, expanding other channel presence and sales, and five, making disciplined infrastructure investments. In terms of product innovation, our new product innovations of the Power Hub and Storage Seat continue to drive AOV and margin. More specifically, we are seeing over one in four Sactionals orders include almost two Storage Seats on average, and one in seven include at least one Power Hub. We're actively working on our innovation agenda with a new product in development that is slated for a quarter one launch.
On marketing and promotion, in the second quarter, our marketing spends were extremely efficient as many advertisers pulled back on their advertising spend, temporarily driving down advertising costs for the market. We have been agile and opportunistic with our marketing spend, focused on maximizing ROI as we lean into platforms where our customer has increased their adoption of over-the-top media, Hulu, which we are currently planning to represent a meaningful amount of our TV spend during the upcoming campaigns. In addition, we saw strong results from our successful Heroes campaign, paid search, social media, digital remarketing, and our affiliate programs. Digital conversion channels such as search, social affiliates, etc , saw some of our strongest ROIs to date as well. In the second quarter, we applied many of the Q1 learnings from testing new strategies on a larger scale.
We had some great success and positive ROIs with what we call warm prospects or those shoppers who have taken an action like ordering swatches or have an open quote. We have targeted messaging to them specifically based on the action that they had taken, and this targeting is done through email, social media marketing, as well as retargeting ads. As we test and learn more about these segments, we continue to expand the ways which we can reach them throughout their digital journey. As we discussed in the last call, our Heroes campaign drove a great deal of top-line sales prior to and during the Memorial Day holiday. It made up over half of our sales when it was running.
In June and July, we began to strategically pull back on the promotional and marketing spends, including a year-on-year moderation in media spend in the balance of the quarter post Memorial Day, as well as in promotions where we lapped the flash sale last year that we did not repeat this year. We did this while successfully balancing and managing the associated top and bottom line impact. As a result, we are feeling more confident about the opportunity to effectively manage volume, margins, and supply chain with a mix of higher margin activities. As we think about the marketing for the rest of the year, the media market dynamics are changing from COVID-driven cost tailwinds to pre-election driven cost headwinds. The flexibility and a disciplined focus on returns remains critically important as we continue to navigate this environment.
In terms of new showrooms, we're still on track to open between 15 and 18 showrooms in this fiscal year and expect to end the year with a total of 104 to 107 showrooms. During the second quarter, we opened eight showrooms in six markets. We have moved to a soft launch mode absent of grand opening events, and new showroom performance is consistent with the conditions in which they're operating in the markets. We have learned a great deal in the past couple of quarters about our ability to operate a truly omni-channel business. In-market results continue to show us that showrooms are driving customer acquisition, and we will continue to open showrooms in the future.
However, at the same time, we have learned a tremendous amount about our ability to reach customers while they are researching our products, and this will lead to some exciting new approaches around our touchpoint strategy go forward that we believe will make customer acquisition even more effective for us. Expanding other channels. We remain optimistic about the longer-term prospects of channel partnerships, and we'll continue to explore the shop-in-shop format with retailers where it makes sense from both a brand awareness and economic standpoint. We have just signed an agreement with Best Buy to sell a limited selection of Lovesac Sactionals and Sacs on bestbuy.com, which we expect to launch in the second half of this year.
As Shawn mentioned earlier, we only ran 19 physical road shows with Costco in the second quarter, representing a significant decline in volume from last year, which was a $4.4 million decline or 60% year-over-year. While we don't currently expect any contribution from Costco for the balance of the year, the volume uncertainty is offset by no material impact on profitability given mix-driven margin benefits. We have higher financial expectations of our partner channels given our growing ability to drive brand awareness on an organic basis. Finally, on infrastructure. In mid-August, we launched our new e-commerce platform, which is powered by Magento, backed by Adobe. Magento's state-of-the-art e-commerce platform enables the advancing of our seamless omni-channel sales approach to meet and exceed the changing needs of our customers in a COVID-19 and post-COVID-19 world.
Customers can utilize our website to fully understand the power and uniqueness of our product platforms and have a unified experience with our showrooms. Some notable features and functions enhancements include the product configurator, which is our new 3D 360-degree product visualization software, which allows customers to create their own Sactionals, adding pieces, rearranging, changing, and customizing their covers, easily adding accessories all from one location and with an environment they choose. An enhanced showroom locator allows the customer to easily find details and communicate with their preferred showroom, as well as obtain driving directions powered by Google Maps directly on lovesac.com. Notably, the customer no longer needs to leave the website to find directions to their preferred showroom. Advanced website targeting capabilities can be utilized to drive customers to desired shopping behaviors based on what the local conditions and customer needs dictate.
There are new payment options such as Apple Pay, which give the customer more choices and simplify the conversion process. These new enhancements will allow us to more effectively operate in all showroom models, virtual, appointment, and new normal as the customer experience is completely omni-channel. On the supply chain side, we continue to reduce our last mile cost by adding two more regional distribution facilities to our operations, one in California and one in Pennsylvania. Although the California facility rollout was delayed due to COVID-19 by three months, we've ramped up operations and are operating 150,000 sq ft. This combined with the planned opening of our East Coast warehouse late this fiscal year is expected to help drive reductions in freight costs and further improve customer experience in fiscal 2022.
In addition, we are engaged in a multi-phase project to launch a supply chain management system, which will drive efficiencies in planning, production management, and order fulfillment functions. Work began in the second quarter, and we currently expect to be completed by the first half of fiscal 2022. We expect to see visibility tracking, demand planning, and forecasting, which will positively impact our ability to execute with excellence in the fourth quarter of this fiscal year. We continue to make progress in the execution of our resourcing plan, improving our cost of sales while at the same time mitigating our supply risk post-COVID-19. We have three production sources in three countries for Sactionals inserts, and we've secured additional discounts to offset China tariffs.
In summary, we're very pleased with the execution of the entire Lovesac team as we have adapted to the changing operating environment and simultaneously advanced our strategic initiatives. Our operational pivot and response to the pandemic was both meaningful and successful as reflected in our second quarter results. This pivot was supplemented by our efficient marketing efforts, coupled with our disciplined approach to managing effective promotions in the quarter, including the Heroes campaign. In the first quarter, we were able to drive demand and cut costs during an uncertain period. In the second quarter, we were able to drive demand through the Memorial Day holiday and successfully manage demand in our supply chain through the balance of the quarter while strategically reducing discounts.
As a result, we are gaining confidence in our ability to balance demand, quality of service, and discount levels in this operating environment, which has been evident in our successful Labor Day results. We have discussed, we reduced and deferred a significant amount of costs in the first half of the year during the pandemic that will return in the second half of the year as we focus on capitalizing on our long-term growth opportunity. These include reinstating compensation, instituting increases for a majority of our workforce, hiring new positions to support infrastructure growth, reinvesting in market tests and product development, as well as increasing operational expenses associated with opening new showrooms.
As we continue to focus on creating a more seamless omni-channel experience for our customers, we are excited about the improvements rolled out to our digital platform that is already elevating the customer experience. Looking ahead, we will remain disciplined and flexible in this still uncertain environment as we continue to innovate, test and learn and expand brand awareness and elevate the customer experience. With that, I'll turn the call over to Donna to review our Q2 financials and a few details related to our 2021 outlook.
Thank you, Jack. Good morning, everyone. I will begin my remarks with a review of our second quarter results, and then provide a framework for how we are approaching the remainder of fiscal 2021. The 28.7% increase in net sales to $61.9 million was driven by triple digit growth in our Internet channel. This was partially offset by a decrease in showroom sales of 58.9% due to the impact of showroom closures related to COVID-19, and a decrease of 59.3% in other sales related entirely to Costco in-store pop-up shops that Shawn and Jack discussed. Total comparable sales increased 72.4% in the quarter. The higher comparable sales growth relative to total sales growth is due to the decrease in our other channel and non-comparable showroom sales.
Our other channel sales decreased 59.3% or $4.4 million, principally- related to a significant decrease in Costco in-store pop-up shops related to COVID-19. In addition, there was a decrease in our non-comparable showroom sales of 63.3% or $3.7 million related to COVID-19 showroom closures. Please refer to our earnings press release for all other details on comparable sales performance. By product category, our Sactionals sales increased 39.7%, our Sacs sales decreased 18.3%, and our other category sales, which include decorative pillows, blankets, and other accessories, increased 188.5%. The decrease in Sacs sales is related to the decline in Costco pop-up shops as Sacs indexed higher within this channel, coupled with promotional activity heavily- weighted towards Sactionals in our showroom and internet channel.
The 30 basis point year-over-year decrease in our gross margin was primarily driven by a 198 basis point increase in distribution and tariff-related expenses, partially offset by 167 basis points of improvements in product costs as a result of vendor negotiations associated with tariff mitigation and continued shift of product sourcing from outside China. The modest 6.5% year-over-year increase in SG&A dollar spend reflects the impact of the COVID-related financial resilience measures put into place and a shift of expenses that took place starting midway through quarter one.
Excluding prior year's financing-related expenses, the year-over-year increase was driven largely by increases in infrastructure improvements relating to our e-commerce platform, increased rent associated with our 97 showrooms, increase in insurance costs, as well as an increase in equity compensation relating to the expense associated with the equity grants awarded in fiscal 2020 and 2021. These increases were partially offset by a decrease in pop-up shop fees relating to the decrease in pop-up shop sales, decreased employment costs related to the reduction in headquarters pay and part-time showroom associate positions, and decreased travel as a result of restrictions from COVID-19.
SG&A, as a percentage of net sales, decreased 785 basis points as a result of the leverage of employment costs, rent, and selling-related expenses such as credit card fees and pop-up shop fees, partially offset by increases in insurance costs, equity compensation, and computer expense related to infrastructure investments. The SG&A financial resilience measures we have taken starting in Q1 resulted in a cost savings and deferrals of approximately $4.2 million during the second quarter. This expense discipline and deferral also impacted our advertising and marketing investments, which increased by only $1.1 million in Q2 as compared to Q2 in prior year. The financial resilience measures we have taken starting in quarter one resulted in advertising and marketing savings and deferrals of approximately $4.3 million during the second quarter of this year.
The year-over-year dollar increase in advertising and marketing was due to an increased media and direct-to-consumer program spend, which contributed to the second quarter sales increase. As a percentage of sales, advertising and marketing decreased approximately 100 basis points from prior year to 11.6% of sales. Depreciation and amortization increased $338,000 from the prior year period to $1.5 million, principally related to capital investments for new and remodeled showrooms and infrastructure investments. In the second quarter of fiscal 2021, operating loss improved to $1.1 million compared to an operating loss of $4.9 million in the second quarter of last year, driven by the sales increase and SG&A leverage I just discussed.
In total, we estimate approximately $5 million of expenses deferred in Q2 will shift into the back half of this fiscal year. Our net interest expense for the second quarter was $34,000 related to unused line fees on our revolving line of credit. Tax expense in the second quarter of fiscal 2021 and 2020 was not material and relates to minimum state income tax liabilities. Before we turn our attention to net income, net income per share and 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.
Net loss was $1.1 million, or a loss of $0.08 per share in the second quarter of fiscal 2021, compared to a net loss of $4.8 million or a loss of $0.33 per share in the second quarter of last year. We generated positive adjusted EBITDA of $2.2 million as compared to adjusted EBITDA loss of $3.3 million in the second quarter of last year, with the just mentioned expense shift into the second half of the year, contributing approximately $5 million of this improvement. Turning to our balance sheet, our liquidity remains strong as we ended the second quarter with $54.8 million in cash and cash equivalents and $9.9 million in availability on our revolving line of credit, with no outstanding debt on the revolver.
Ending inventory increased 0.9% year-over-year. This is due to an increase in our stock inventory dollars of approximately 5%, offset by a decrease in capitalized freight dollars relating to tariff. Free cash flow, defined as cash from operations less CapEx, was approximately $9.9 million in the 13 weeks ended August 2nd, 2020, as compared to the use of approximately $16.8 million the prior year quarter. The year-over-year improvement was driven principally by an improvement in cash from working capital and the shift of certain expenses from Q2 into Q3 as part of our COVID mitigation effort. In terms of our outlook, given the continued uncertainty around COVID-19 related disruptions, we are providing a limited outlook for fiscal 2021 with some specific comments around Q3 given expense shifts that are taking place.
As Jack and Shawn mentioned, we are coming off a strong Labor Day period and we feel confident about our ability to drive year-over-year sales growth in the second half but remain mindful of many unknowns. Keep in mind, we are not assuming any contribution from Costco pop-up shops in the second half of the year, so you should update your models accordingly. We are expecting a third quarter year-over-year gross margin decline of approximately 200 basis points. This decrease principally relates to a timing shift of China vendor rebates realized in Q3 last year that will be realized in Q4 this year, inventory carrying costs related to replenishment of our safety stock inventory and startup costs of the Northeast third-party warehouse. These impacts are partially offset by a decrease in promotional discounts and a decrease in product costs coming from our overseas vendors.
Q3 will also be impacted by the expenses that we deferred in the first half of the year across SG&A and advertising and marketing. As a result, we expect to see sizable year-over-year operating expense increases and significant deleverage year-over-year in Q3 as compared to Q2 before realizing significant leverage and a meaningful increase in adjusted EBITDA in our seasonally high volume fourth quarter. Given the deferral of expenses from the first half of the fiscal year and strategic reinstatement of our infrastructure investments beginning in Q3, we believe our adjusted EBITDA loss for Q3 will be between $10 million and $11 million. With the shifts in adjusted EBITDA dollars between the first and second halves of fiscal 2021, as just described, we believe we will net to a positive adjusted EBITDA for this fiscal year.
We still expect to generate cash from working capital this year through accounts receivable, inventory reductions relative to sales volume and vendor approved extended payment terms. Our expectations still reflect that CapEx will be in the $12 million-$14 million range with 15-18 planned new showroom openings for this year. In conclusion, we are very enthusiastic about the second half of the year and confident in our ability to drive healthy levels of sales growth. There is some choppiness of expenses across the quarters, but when looking at the second half in totality, we expect to drive a significant increase in adjusted EBITDA, reflecting strong top line growth, improving gross margins versus second half last year and expense leveraging.
We learned a lot during the last couple of quarters and these learnings are incorporated into our go forward plans as we continue to expand our brand and gain further market share of the very fragmented industry. With that, we would now like to turn the call back to the operator who can open it up for questions. Operator?
Thank you. The floor is now open for questions. If you would like to ask a question, please press star one on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handsets before pressing the star keys. Once again, that is star one to register questions at this time. Our first question is coming from Camilo Lyon of BTIG. Please go ahead.
Thanks. Good morning, everyone. Congrats on a very strong quarter here. I wanted to focus on your inventory position and some of the supply chain comments that you made, Shawn. We've been hearing more and more of supply constraints from some of your competitors and wondered how do you feel about your inventory position today as it stands, given the robust demand that you're seeing, and what's your ability to continue meeting that accelerating demand? And are you seeing any pressures within any parts of your supply chain?
Yeah. Thanks for the question, Camilo, and I'll say a couple things, turn it to Jack. We have no inventory concerns. We've very carefully managed through the COVID crisis, making decisions for the business to allow the shape of our sales really fit the business through the worst of what we think is the COVID crisis to date. You know, in terms of managing our marketing spend, and as you can see from the results, allowing the business to flourish, you know, through this time. We look forward to a second half where we can be aggressive and focused on driving sales and have no inventory concerns. I'll let Jack add to that.
Yeah. Thanks. I think what we saw was two things going on. In the short term, obviously, with the second quarter sort of the beginning of the second quarter really beginning to slow down, then a speed up in business, a rapid speed up, there was a little bit of whiplash in the supply chain. What I would call there may have been some very short-term pressures from a strategic point of view in terms of building our network, diversifying our network, adding warehouses, et c, we are exactly where we need to be. While there was a little whiplash due to COVID, strategically, we're exactly where we need to be in terms of continuing to grow our capability to deliver a lot of product with a high level of customer satisfaction.
Great. Then if we can just focus on this pretty remarkable and continued online digital acceleration. Maybe if you can just help us understand how that sales growth progressed through the quarter, and how your online demand changed at all the trajectory maybe throughout the quarter as those stores have reopened and here into the early start of Q3.
Yeah. It's hard to, Camilo, to say that overall-
Mm-hmm.
In terms of timeframes because the country was, I'd say, operating in different timeframes and different levels of opening. What we're seeing is sort of microenvironments. We can tell you this is in environments where showrooms were completely shut down. We saw extreme increases in e-commerce. However, in environments or trade areas where showrooms start to open up again, we still see very good increases in e-commerce, but greater total trade area growth. I think what we've learned so much about it is our customer will shop in multiple ways. If we can combine the way our teams work between really being agnostic about what channel the customer's starting in, but getting to them in a good place, we're very successful.
In a nutshell, what I can tell you is this: We saw probably extreme accelerations. We obviously saw extreme accelerations in the e-com business. Probably something that would, you know, as many people have said, COVID has advanced some areas of our thinking by two to three years. I think we will go back to a more moderate percentage of the business being e-com, but I don't think we'll ever be back to where we were before. Also by defining our business in a different way, I'm not even sure in the future what's gonna be an e-com business versus a trade area business.
Got it. Just finally for Donna, if you could just help us understand, is that deferral of $5 million going to be solely accounted for in the third quarter, or will there be some split of that between Q3 and Q4?
Yeah. The majority of it will be in the third quarter, but there is some shifts going into the fourth quarter as well. If you wanna think about the majority is going into the third quarter.
Got it. Very helpful. Thanks.
Yeah. Principally around marketing.
Perfect. Thanks, guys, and continued success.
Thanks, Camilo.
Thank you.
Thank you. Our next question is coming from Brian Nagel of Oppenheimer. Please go ahead.
Yeah, good morning.
Good morning.
I also would like to add my congratulations for.
Morning
... this more tough environment. The question I have is just, it's a bit of a follow-up to the prior question. With regard to real estate, you talked in your prepared comments about continuing, you know, opening at a nice clip, showrooms. Given what you've seen, you know, with regard to the flex high, the significant flex higher in online sales and maybe even you're seeing some of the performance of these units or trade areas as you reopen your showrooms, has your philosophy towards openings changed? Are you negotiating more with landlords on rents or even shifted where you would be opening these showrooms?
Boy, yeah, there's a lot packed into that. What I can say, we're in the middle of a very dramatic relooking at it, what we're calling now, as opposed to thinking of it as a real estate strategy, it's a touchpoint strategy. The background behind that is that we've already, in stage one, disaggregated the need for inventory to be part of a retail operation, which obviously makes us super efficient and works in our shop in shops and everything else. What we've really learned in the last 60-90 days is that we can start to also, in many cases, do the same separation of the need for touch points to actually generate traffic on their own because we can drive our own traffic. When we're in a condition like this, it does two things.
One, it allows us to look at real estate in a completely different way, much more asset light, much shorter arrangements. Obviously, it also gives us a very strong point of view to go back and renegotiate. I think what you will see is an acceleration of touch points at significantly less capital than what we would have previously planned as we go out in the next couple of years, but a lot more to come on that.
Got it. Thanks. The second question I have, not related, but we discussed previously additions to the product lineup. Given, obviously, very fluid and a lot going on here, but any more comments on when we should be thinking of the timing of that?
Yeah, we are still planning at this point a Q2 launch in next fiscal year, and we're very excited about it. I don't know, Shawn, if you have any additional comments.
Yeah, we've kept it pretty close to the vest and we'll continue to do so. We look forward to it. Everything's moving, everything's on track, moving forward, and we think it will be meaningful.
All right. Thank you.
Thank you.
Thank you. Our next question is coming from Maria Ripps of Canaccord Genuity. Please go ahead.
Good morning, and thanks for taking my questions. You highlighted very strong Labor Day sales this quarter. Can you talk about your marketing strategy around Labor Day this year? What are you seeing in terms of cost of media, sort of more recently? Are there any changes to your broader advertising strategy heading into the holiday season this year?
Okay. Well, I'll give you what I know right now, but not too much into the future. I think overall, we certainly expect to see total end-of-year spending on marketing consistent with what we've discussed earlier, ending at around, you know, 12%-13%. Any fluctuations you see in the short run will be smoothed out. I think what we can tell you about Labor Day is we were extraordinarily pleased with our ability to leverage marketing. We saw ROIs going into Labor Day and through the demand cycle so far as high as we've seen this year. Things are working very well. That's obviously part of the reason we feel comfortable about what Donna had mentioned earlier. ROIs continue to rise.
We're being very conservative. Our expectations are actually built a lot more conservatively on ROIs because we are a little bit concerned about what happens with media effectiveness as you get into an election year. We've got an election year, which we're very concerned about, as well as you know, potential new COVID-19 disruptions. In terms of what we're seeing right now, we're seeing higher ROIs, and we're able to deliver the business on a higher quality basis, meaning overall, we're starting to see our ability to achieve goals with lower discounts and more to come on that as we continue a series of tests and learns.
Great. Thank you. Secondly, have you seen any changes to your target demographic, either in terms of age or household income or in terms of how consumers maybe engage with your product?
What I would say is, you know, COVID has created a lot of dynamics that are pretty interesting, as everybody knows. I would say, as we entered into the year, we are seeing an expanding of our customer base to be not only young customers, but more mature customers. I think through this year, what we've seen is an expansion through even more and more younger customers engaging, and I think that has to do with the disruption of brick and mortar and us having to operate primarily as an online company for a number of months. It'll be really interesting. You know, what we're all trying to figure out is what is the customer shape? What does the shape of the customer look like in the next couple of years?
I would say with that, one thing to think about is one of the dynamics we are really sort of, I think positive for us is as these millennials start to move to the suburbs, which we believe this is a tail, a long-term tailwind, and are making life-changing decisions, this is very positive for the way we're positioned. We're very positive about that at this point.
That's very helpful. Thanks for the color.
Thank you. Our next question is coming from Matt Koranda of ROTH Capital Partners. Please go ahead.
Hey, guys. Thanks. Just wanted to spend a little time focusing on the third quarter guidance. Revenue growth, it sounds like it got off to a good start, and you guys mentioned a strong Labor Day. But I'm just curious in terms of the revenue guide for 3Q, what are we counting on for the rest of the quarter in terms of growth? Are we counting on sort of similar cadence to what you guys have experienced quarter- to- date?
The guidance that we gave was just overall quarter. I'm not quite sure we're providing any type of cadence during the quarter. Shawn Nelson had mentioned, in his script, that we are expecting going into Q3 a growth rate year-over-year, similar to what we saw in Q2, but we're not discussing the cadence during the quarter.
Yeah. I mean, what we can say is we typically, with our cadence, you know, our biggest volume events typically are around the furniture buying events around Memorial Day, Labor Day. There are minor events as well. So what we can say is, really, if you look at Labor Day as basically through today, 40% of the quarter is in and we have pretty good confidence. You know, obviously, our strategies will change for the second half because we don't have another major market share event. So what this does do is give us a high level of confidence going into the fourth quarter that our targeting is right, our media plan is right, and that we're capturing customers the way we expect to.
Okay. That's helpful. On the gross margin guide, I mean, higher revenue, but it sounds like we're still facing some gross margin pressure with the guidance for down 200 basis points year-over-year. I know you guys called out maybe a little bit of deleverage from sort of ramp-up of the third-party logistics facilities. What are the kind of the other big items that you put in the headwind category that are offsetting sort of the product cost savings that you guys have achieved so far?
Yeah, the other probably the biggest, there's two, right? One, we had mentioned that our vendor discounts, which in the third quarter of last year was approximately $1.2 million, we had achieved the vendor discount levels by the end of Q3 of last year. We are expecting to receive discounts of that amount, if not more. The achievement of those vendor discount levels will be recognized this year in Q4. That's a shift. The other big item relates to the infrastructure investments that we're making into the Northeast warehouse. Those are the two largest items that are netting up against reduced product discounts and reduced product costs from our overseas vendors.
Okay. Got it. And then when I look at the sort of adjusted EBITDA guidance and what it implies for OpEx, I guess I'm getting to a number that's more in the $45 million range for overall OpEx. Sequentially, if I take the $5 million of deferred expense that sort of spilled over from 2Q, that might get me into the high $30s. What are some of the other items that I guess you're expecting to spend more robustly on in Q3 that drive that EBITDA guide?
The biggest one is probably the marketing, as Jack had mentioned, right? We actually, I would say we leveraged nicely on the marketing, but that was strategic in Q3. We'll start to see that investment going back in pretty heavily, I mean, in Q2. We'll start to see that investment going back heavily into in Q3. The other thing is, we will be reinstating some pay cuts that we've already announced to the team. We've started the new hire process again to strategically help us with the volume of growth.
Many of the things that we had mentioned back in Q1 that were put on hold as we managed through our liquidity, you know, we managed through the COVID-19 liquidity obstacles that we felt that we would be faced. We feel we're in a very strong position. We're happy with the performance of the business. Our financial position, our liquidity is strong. We're gonna start reinvesting in the items that we put on hold, technology, people. As you know, the 3PL, the additional 3PL had been put on hold. You know, now we're opening that up, the marketing initiatives. There's a host of things that we discussed early on in the year that we put on hold that we feel that we're in a very strong position that we can start reinvesting back into.
Yeah. Just to add some flavor to that, I think Donna had said something to me earlier, but if you think about the year, the second quarter is such an anomaly, it doesn't even make sense to look at it alone. If you add the second and third quarter together, we're really exactly where everybody expected us to be. What we decided as a team is not to take all that to the bank and reinvest because we've got a strategic plan that's a lot bigger than maximizing, you know, short-term profits. Anything that we could reinvest, we've done to get us back to the strategic plan, which is all about where we're gonna be in 12 months from now and 18 months from now. We're very comfortable with our progress in terms of getting back to that plan as well as delivering the year.
Very helpful, guys. I'll jump back in queue. Thank you.
Thank you. Our next question is coming from Alex Fuhrman of Craig-Hallum. Please go ahead.
Great. Thanks very much for taking my question. You know, it seems like you've had a lot of success these last couple months with customers bundling the Storage Seat and the Power Hub at really strong rates. Has that mostly been driven by new customers, or have you also had prior customers coming back to upgrade their Sactionals? Just more broadly, if you could comment on the rate of repeat purchasing you've seen over the last couple of years, has that changed at all over the last six months? Thank you.
This is Jack. I think the storage seat surprised us. I think what surprised us the most was the significant attachment rate on new customers. We certainly have a nice penetration, and it's certainly adding to our repeat rates with our current installed base. I think the biggest surprise or the most positive part is that new customer is really adding to AOV. It's adding to pieces purchased as well, so we're very happy with that. The second part of your question, I'm sorry, what was that again, Alex?
Just the percentage of revenue or transaction from repeat customers. Has that changed at all this year?
What I would say is we can't really look at it on a quarter-by-quarter basis because we had such high, rapid new customer growth during the COVID disruption that it would naturally show during that quarter. We just had a lot more new customers in terms of relative to repeat because the repeats were sort of going on hesitation.
What I can tell you is in the very large context of all of our cohorts year-over-year, we're seeing very consistent growth of our repeat rate between from customers year-over-year. A new customer in 2015, what their value became in 2020 was at a very consistent rate, first year and second year repeat, as it would be in a new customer that we acquired in 2019. We're not seeing any change on a long-term basis. It's just too close in for us to tell you what we think is happening this year.
Great. That's really helpful. Thank you.
Thanks, Craig.
Now, what we are seeing, just to make sure I'm being clear on that, when we acquire customers, we are acquiring them at a significantly higher AOV, and we're expecting the new products that we've talked about as well as the products we've launched in the last six months to continue to add to that growth. Our new customers are more valuable on day one than we've previously seen.
Thanks.
Thank you. Our next question is coming from Alex Arnold of Odeon Capital Group. Please go ahead.
Hey, guys. Great work on the continued successful pivoting. Two quick things. One, it sounds like the thinking on Costco ramping back up in the back half is shifting a little. If we could get some perspective on how to think about contribution last year or drag this year, it would be helpful. The other thing is if you could quantify at all the positive comments around Labor Day, compartmentalize it, and give us some year-over-year views as to how that played out this year.
Okay. Yeah. I'll start with Costco. I think the first thing, you know, The Costco relationship and Costco has been a great partner, and obviously, Costco as a company has a lot of a lot of good target customers that we would share an interest in. I think the challenge with Costco really is the history of Costco is that this was an agreement we signed three years ago prior to really having the kind of handle we have on today in terms of driving our own demand. Primary reason of the relationship and the way we worked it out was because we wanted the awareness levels and the demand that they could help us develop.
As time has gone on, we're in more control of our demand and want our partnerships to be profitable as well or more profitable. I think it's really the delay in Costco. The delay, first of all, was caused by COVID, but it came at a time when we were renegotiating future contracts. Given our ability to pivot so quickly and drive profit into other areas, we decided we need to relook at in terms of making it a win-win situation for us.
It's not a strategic issue with us. It's really an agreement on how to operate the business that we need to work through with them. It's win-win with both of us. For example, in terms of the Best Buy relationship and the Macy's relationship, we see those as big opportunities as well as other relationships in the future where we have a win-win relationship in terms of driving profitability and sharing in the growth.
Any quantification of the drag for the back half that we could tag to that, and also any quantification around just this Labor Day versus last?
Yeah. I think what we're seeing, I think what Donna discussed earlier is we don't see any negative drag to the total company in the second half because of what we're seeing in terms of returns on our direct businesses being higher than initially expected and our ROIs being very strong. So, this year we don't see any material drag on the business. In terms of more insight on Labor Day, what I could just tell you is we're very pleased with the way the business progressed, not only on a top line, but our ability to manage discounts. I'm very comfortable with the guidance that Donna has provided.
Great. Keep up the good work. Congratulations.
Thank you. At this time, I'd like to turn the floor back over to Mr. Nelson for closing comments.
Yes, we want to thank you so much for joining us today, especially to our incredibly capable and diverse Lovesac family of associates across the nation. Our appreciation goes out to you. You continue to show grit and passion every day. These individuals are the driving force that continue to make our organization thrive. At Lovesac, we believe that the couch is the new kitchen table. It's our mission to see our products in the heart of every home on the planet. We invite all to join our extended hashtag Lovesac family on social media and at lovesac.com. Thanks again, and we look forward to speaking with you next quarter.
Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time, and have a wonderful day.