Thank you all for joining us. My name is Brian Nagel. I'm the Senior Equity Research Analyst here at Oppenheimer, covering consumer growth and e-commerce. This is a continuation of our 26th Annual Consumer Growth and E-Commerce Conference. We very much appreciate everyone tuning in this morning. I'm pleased to have with us our first presenting company today, Lovesac, and a few members of the company's senior leadership team here. We have Founder and CEO, Shawn Nelson, President, Mary Fox, and CFO, Keith Siegner. I appreciate all you taking the time to join us.
Thank you for having us.
Hey. Thank you, Brian.
Absolutely.
We're going to structure this as an informal fireside chat with me asking questions and the Lovesac team answering those questions. To the extent there are any questions from the audience, just please send them through the chat and I'll be happy to work them into our conversation. I thought we'd start, because I'll direct this to you, Shawn. I've had the pleasure of studying Lovesac now for a while. I've very much enjoyed watching the company, its brand, its position evolve. What I would love to start with is just your perspectives on the brand and how the brand is evolving here and the overall, let me say, the underlying strategic position of the brand today.
Thanks, Brian. It's great to be with you. Lovesac is a company that was founded a long time ago and has followed a very strange path to growth. We stand today now as the leader in the U.S. for sectional sofas. We make a really cool product that we are the most famous for today called Sactionals. This is a couch that you can arrange and rearrange endlessly and keep it for the rest of your life if you want to, if you're willing to maintain it and grow it and change it and wash it and all these other things, and that's why customers love us. That love for a product that can actually sustain.
In this world of sustainability messaging and whatnot, so many things actually let us down, and we all are privy to the effects of planned obsolescence and all these other things. Lovesac's brand really flies in the face of that. Our ambition is not to expand that into a small box online version of West Elm or something. We do have opportunities to compete more broadly in the furniture category. You're going to see some of that action this year. Ultimately, our ambition is to build the most loved brand in America. That might sound like a tall order from a company that started by making gigantic beanbags. Whether you've sat in a 6-ft or 8-ft Lovesac before, a chopped up foam-filled, not beanbag, and felt the love that comes from that experience, and we lead that small category.
One of our amazing Sactional sofas, again, that can be with you for decades because of all of its really unique attributes. It really is a product and a brand that resonates with people in a different way and allows us to show up in the world differently. We're really excited about what's going on inside the company right now. We like to say it's not just that we make great products, because we do. The patents around Sactionals have been formidable. The growth that it's brought the company to 10x the company since our IPO eight years ago, we're really proud of, and our ability to maintain strong performance even post-COVID, which has been terrible for the furniture category, all on the back of this brand.
Now we're poised to move into a new room, leveraging these same brand attributes and compete even more broadly and expand the company much further. It's an exciting time at Lovesac. We have all kinds of cool things going on. Like I said, it's not just that we make great products, but we've learned to sell stuff greatly. We show up in the world very differently than others, and we're very proud of what we're building.
Shawn, just to follow up on that, you've had a number of recent product launches or additions. Maybe you could talk about that. I think one of the most exciting things that you've talked about recently is this forthcoming move into a new room, which we should see, I guess, next year. Maybe we can talk more extensively about that.
We haven't announced it specifically, we have said that we will be expanding into a new room with a full suite of products early next year, we view this as a huge deal. Lovesac has done very well over this past decade by being radically focused. We don't even today sell rugs and lamps and credenzas and end tables, of course, like would be expected from a company that has a huge business in couches. We've put on the blinders. We've stayed focused, even in couches, we only have a couple of, let's call them lines, where most of our competitors, especially at our scale, have 30 and 40 styles and collections of sofas, Sactionals, et cetera. Our business in Sactionals eclipses most of those competitors in scale. It's been a wildly efficient business.
We want to take all of that efficient thinking in SKUs, efficient thinking in inventory, of course, designed for life nature of the product, things that are built to last a lifetime, designed to evolve, scale that into a new room where we believe we can have an anchor product similar to Sactionals. It's washable and changeable and modular and can grow and expand with you, do it in a category that we have not yet explored, in a category that customers are asking us for. That's, I think, a hallmark of who Lovesac is. We're not a merchant-led brand. We're a lot more like a P&G, a PepsiCo, than a merchant-led furniture brand. We do deep consumer research, consumer insights that have led us to this big opportunity as we see. Our ambition is to double the company on that.
Take the same playbook that we're good at and go do it again in a new category. Meanwhile, filling in some of those gaps around the edges, even in the living room where we compete today to drive bigger AOV, bigger basket size, continue to cultivate that business over time as well. Good steady growth from our living room business going forward, we hope, massive upside opportunity starting first half of next year in this new room that we're going to come into with guns blazing.
The exciting thing about that is because we're launching, of course, on the heels of, I think, so much success over the past number of years, both at retail and of course online through direct marketing methods, our ability to show up with a fulsome offering, still very tight, still very controlled from an inventory standpoint, but a very competitive offering is much greater than it was when we hurled ourselves at the furniture category through couches, let's call it 10 years ago. You're going to see us bring the heat, and we're really excited about what that new room opportunity offers the c ompany and our growth proposition.
The one aspect of Lovesac that I find very intriguing and I think is maybe not totally appreciated within the market is just, I would say, the investment acumen. As you talk about the products that have been launched recently, enhancements to your existing products that launch, and then maybe more importantly, this new room. Let's talk about it. For how long have these products been in the works? Been basically within the Lovesac enterprise, been designed and tested, the investments that have gone behind all this?
Yes. Thank you. Years and years. We've been cooking on this new category, honestly, for the better part of a decade. That might sound crazy, but we got really serious about it two and three years ago. The reason that it takes so long and it's about to come to fruition for us to cook these things is, again, because we're not just making like-for-like product and putting our name on it. We're not just sourcing stuff around the globe and slapping a Lovesac box around it and coming to market. We reinvent a category when we enter that category. Sactionals reinvented sectional sofas, and by the way, have dragged with it half a dozen or a dozen startup copycat lookalikes as evidence of that. They can't do what we're doing with Sactionals because of our patents and also the way we go to market.
Again, we're not just good at making things, we're good at bringing them to market through digital means, through Lovesac stores. You can't even buy Lovesac from anyone but Lovesac. We're a true direct consumer brand. We operate 280 Lovesac physical locations around the country, that experience inside that store is just as sacred to us as the product itself. It's the reason we have the success that we have, both at the top line and at the bottom line. We're profitable, cash flow positive. We have our highest cash levels ever generated in the year we just rounded out, and no debt, right? We're going to take all that strength, apply it to this new category, having cooked on it for years now.
It's like no one's more excited than we are to finally get to the launch point that's coming, because it's finally like the clock is ticking. We're within the next, let's call it, 12-month cycle to be coming out with this. Having cooked on it for so long, again, not just the product, but the whole retail experience, the whole, call it in-store demo experience that will extend, of course, through digital means. All of this is culminating over these next 12 months into this new room, and there will be new patents associated with that, new waves to be created, and a whole new era in that realm of the home category that's not been seen before because we're messing with it.
We like to say, by the way, and this is the funny aspect about Lovesac, there will be fewer couches sold on Earth ultimately because we mess with couches. Now, we have a long way to go. We have low single-digit market share overall, even despite this wild growth, because it's such a big and yet fragmented market. The TAM is huge still in the core business that we're in. We're looking at a wide-open playing field that we've never touched with the same innovative approach, and we're excited to get started on that.
That's very helpful. Let's take a step back just before we talk more about the particulars of Lovesac. This is our consumer conference.
Yeah.
We've had a lot of discussion out there just on the health of the consumer, and I know you have discussed recently the health of the consumer in your comments. I'd love to get the update. I should say, the update from Lovesac as to how you see the health of the consumer and any consumer weakness may be impacting your business in the near term here.
Yeah, look, it's been a tough few years since COVID. Who knew that the global pandemic would cause an economic boom, especially in the home category? We enjoyed that, we took that growth, we haven't stepped back. The furniture category has been decimated in those four years since, yet we've held our revenues steady and continue to generate profits. I'd love to kick it to Mary, our president, who's really plugged in tightly to our marketing machine and to the customer to give you some data on that.
Yeah
More color there.
Yeah, no, thank you, Shawn. Yeah, Brian, great question. Obviously, Shawn, you mentioned it earlier, we obsess about the consumer, both in terms of delighting them in our innovation, also understanding the trends and how do we monetize on them. Certainly for sure, they're still buying. They're buying a lot of product. They are a little bit more selective, as we've been seeing, and Shawn, as you said, from that pull forward during COVID, the category really is back to at a lower level than 2019. The good news is we talk about in the business is we're just one day closer to kind of really getting that category back into growth.
What we're seeing from a consumer sentiment and trend perspective is decision cycles are a little bit longer, so they're taking time to do their research and then being very considered around what they're buying. They are buying a little bit more skewed to tent-pole moments during events, so that value prop is critical. I think as we've shared with you, when it comes to Lovesac, what's really encouraging is when you bring great innovation, they really value it. You know we've talked to you about the amazing recliner that we launched 18 months ago. That is a more premium add-on, but the experience is incredible. It's the best recliner on the market. The adoption of that has been so strong. Even kind of in this more pressured time, they really value innovation.
I think for us specifically, our customer does skew more higher income, and as you know from all the trends, the higher income consumer, whilst they're facing these inflationary pressures that we all know of, and we read of, and we see every day, they have held up relatively better. We've seen a lot more acceleration at the higher end of the transaction size, more of the premium add-ons, et cetera. The lower-end size transactions, Brian, as we've talked about, they have been a little bit softer, as that consumer's fighting a little bit more around, how much can I spend? I think one of the wonderful things about our product is you can add on to our platform at any point in time. I have my Lovesac. It's 15 years old, way older than ever Shawn and I ever dreamt of meeting you.
Fast-forward, I've added multiple things onto it, StealthTech recliners. I've added new pieces on as we added new things to our family around pets and kids and all of that. You can keep adding on. At times, people are buying less pieces and then later on adding on. I think that's one of the incredible elements of our platform is enabling people to have that flexibility. For us, as we think about continuing to win in this year and beyond, obsessing about the consumer, delighting them with innovation, and then really figuring around how do you get that value prop right for the different consumer segments, I think a couple of the highlights to share with you today.
That's very helpful. Maybe talk about the marketing. I know you talked I guess, may I ask a couple questions? Talk about how the overall marketing engine of Lovesac is evolving with your use of digital as well as still some traditional media. Also maybe more near term, I think you were discussing this recently about maybe a marketing message more geared towards that consumer that's struggling now, and how to get them over the bump here in a temporary time to buy a Lovesac.
Yeah. No, great. Yeah, thank you for the question. As we've really been talking, our marketing engine has been pivoting a lot more to digital social first, paid earned model, really moving off what we were more traditionally invested in around linear TV. This is really helping us to be able to drive greater conversion and greater unit economics. Within all of that, as you see, that's resonating with many brands. Shawn, obviously, as the founder, there's a real ability for us to tell our story. We've been evolving our content engine. We talk a lot around how do we win, obviously, with search starting a lot around LLMs, really making sure that Lovesac is front and center as customers are thinking about making this very considered purchase. I think for us, that's been super important.
The other element as we think about the experience, because it's all leaning into marketing. Shawn talked about the showrooms and really this very effective demonstration. Consumers come in, and they go, "Okay, this is what I am looking for." We take them through a journey, understanding what matters for them in their life, and then we have a really good way of them being able to deliver them the solution they want. But we also have our number one touch point is our website. There's been a lot of work done on our website to really help improve that journey and help drive the conversion through the funnel, linking to the digital storytelling that we're doing, and then how do you really harness them through to the conversion. I think that's been great.
A couple of examples that we've shared, quarter one, what we've brought in, and you know, we announced Heidi Cooley joined us last year as our CMO. She came from Crocs, where she really turned that brand into the cultural zeitgeist brand that was just so relevant around collaborations and just being the item to wear. We're thrilled she's been with us for a year, and you're seeing a lot of her work coming to life. Back in February, the weather outside is not so great, people are kind of looking around. What her leadership really focuses on is tap into cultural moments that are happening. We launched a campaign called [SIT]UATIONSHIP that was really tapping into the insight that people often settle for things in life, and they should really challenge themselves. There was just a whole lot of viral conversations around this.
Her ability to create a moment in a moment of just a sea of sameness, and a whole campaign around challenge the couch you're sitting on, and are you settling for something that isn't as comfy or isn't as flexible and doesn't do all the things Shawn talked about. We had an amazing level of success. More than 1 billion impressions, great conversion. It's just one example of many, that we're really trying to bring the relevancy to what's on people's minds. Then the last piece of your question around back to that consumer that's very focused on value and how do I find something that can fit my wallet right now, there's a lot of work that we're doing, both in sharpening the story, to be able to demonstrate that value, but also back to the website experience.
Creating starter packs, being able to show people very clearly we're starting at on a certain fabric choice and really helping them to be able to be very clear as soon as they start to experience the brand where there could be those opening price point opportunities. Also through explaining the journey, showing them that they can add on over time. There's more to come, actually in terms of enabling that consumer that wants the brand, loves the brand, has drawn. Shawn, we hear it all the time when we're in showrooms, they are so excited. They've heard it from their friend, their neighbor about this great brand. They come in with four credit cards at times to be able to make a transaction. You'll see more from us coming, particularly on the website around how that's going to be sharpened.
That's very helpful. Let's talk about the showrooms. I think that's obviously a key consumer touch point. Where are you now? Growth in showrooms. I guess another real question I have is as we think about this rather significant product extension that's forthcoming, how are the showrooms going to evolve to basically showcase more items?
Yeah, it's a great question, and to step back to this idea that Shawn was talking about before, about you could think of it in effect we are building a business inside our existing business. You could even call it a startup to some extent. What's important about that, though, is we're not a startup, right? We have a national brand. We have a true omni-channel distribution system, including the website Mary just talked about, 281 stores, and distribution access points through our relationship with Costco. We have these latent advantages, and we have an installed base of rabid fans who love us and would love to have more stuff from us. What's important about this is it could be very easy to fall into the trap of saying, "Listen, we have some of the most productive small box retail expressions in all of consumer.
Let's just go as fast as we can." What we've done here is to step back for a second and to think more holistically about this, because the world is changing. Okay. Here we are, a product company evolving into a lifestyle brand. Right? That's number one. What market share do we think we can take? That's where we start. Then we say, "What's the most efficient way to take it?" Right? How do we take the 281 stores that we do have and make them work the hardest for us? What's the efficient curve, the efficient frontier of where we should get to? Is it how many can we have or how few do we need to provide an excellent consumer experience that's convenient and that really builds the brand? Right? We're rethinking this.
I think you're going to see a number of different expressions from us in the future that'll really tap into the creativity and the head start that we have as an omni-channel purveyor or omni-channel brand. I think the way I would think about this is as follows. We are not going to fundamentally change from our highly efficient, effective roots. We're going to experiment around the edges. Do we have stores that are only for the living room? Do we have stores that are only for the new room? Do we maybe bookend a really powerful center so the Lovesac brand exists at both, right, and they can send people back and forth?
By the way, that can also be very efficient for us because we can share people, share management, share all the operational behind-the-scenes characteristics that make us an efficient executor of that customer experience. Stay tuned on this. Again, the point here is, what's the most market share we think we could take? What's the most efficient way to take it? That's where you're going to see us moving forward.
Very helpful, Keith. Let's shift a bit to external tariffs. Tariffs have been an issue for Lovesac. The way I'll frame the question, maybe an update on what you're seeing on the tariff front and what you've done so far to mitigate tariffs. I think you've started to receive now some tariff refunds, at least initially. Then maybe the bigger picture piece of the question, this will be more for Shawn, is you've talked about this rather significant reshoring effort kind of where we are on that, how we should think about the longer term, either business model or financial implications.
Yeah, let me start there, then Mary, you-
Yeah
You pick up.
Keith and I'll say the rest. Yeah.
Yeah. Look, we're done with tariffs. We're onshoring our business. Look, that's a dramatic statement. It's going to take us quite a while to do it all, no joke, we announced a few quarters ago that we'll be making Sactionals, which is the lion's share of our sales, especially by the dollar. Sactionals inserts, seats, and sides that you can arrange and rearrange endlessly. We're going to begin making seats, which is our biggest dollar item by far in this business, in the United States for costs that are comparable to what we're making them for in Asia, which is remarkable, I think. Landed, delivered costs. We're going to be doing that before the end of this year. We're going to be doing that just later this year. That's been, again, a two-year project.
We had to re-engineer the product to be built for mass production, for lights out, not quite, automated manufacturing. Far less labor, obviously, out of new materials. Of course, the finished Sactionals pieces will work seamlessly with the ones you already own and will look and feel the same when they're wearing covers. Underneath, new materials, new engineering, new patents on new features that current Sactionals don't even have, that will make the product even superior, not just to our competitors, copycats, and startups that are trying to do things similar, but to ourselves. This is a better product made in America for less money, we're really excited about that. That comes live later this year. We'll chase that down with a redundant factory to then take it further into our product catalog. We want to be done with tariffs.
We want to be done with pirates and storms and all the other wars, and all the other volatility that's out there. Meanwhile, for, I guess, just deeper info on tariffs and these rebates and everything, I'll turn it to Mary.
Yeah, I'll start, and then Keith, you can round us out. I think, the first thing from our side is we've been experiencing tariffs for a long time. 2018, as you know, there were the Section 301 tariffs that came in. As a company, we had been dealing with that for some time. It's not the first rodeo of dealing with it. Obviously last year, a number of different tariffs came into place. That was a very significant headwind. As you know from our results and everything that Shawn shared at the beginning, we figured our way through that through a four-point plan. Firstly, working with our very long-term vendors. They own the factories. We work directly with them, a lot more efficient in the cost model. They really help support us there.
There was a lot of work done around surgical pricing opportunities, looking at how we manage the business from a fuel for growth, as we call it internally. How do you drive out more efficiencies? How do you drive some offsets to cover for those tariffs? Importantly, with tariff rates being different at each country level, a lot of work around diversification, and moving some of our production out. The work that was done obviously garnered the results that we saw through last year. We feel very proud to the team because it was highly intensive. As we continue in this year, tariffs move in the news all the time.
We've planned for what we know today, again, working at mitigation and how do we manage, because as you know, there's also costs of goods inflation that's coming in because the oil price increases, albeit hopefully that will start to lower down soon. The team are continuing to run that playbook. Keith, as we shared yesterday, the team had applied for tariffs. I'll let Keith walk you through that detail. We've started to get some of those refunds in. Keith, I'll hand to you on the detail there.
No, thank you. I do think it's important context for one second because this is important in terms of the overall outlook and guidance and factors Mary just discussed. When the IEEPA tariffs were deemed to be illegal, there were other tariffs that were put in place immediately. Sometimes I think we talk to folks who think that the tariffs that we were paying went away and we're not paying them right now. We are paying Section 122 tariffs right now, which go through the end of July-ish.
Yeah.
What we've built in is a continuation of those beyond July at the existing levels. No increase and no disappearance of those. Our guidance considers that the tariffs we are paying right now, including the 301 and the 122s, just endure throughout the rest of the year. All right. Now to go back to the IEEPA tariffs. We applied very early on. We were one of the first companies to get all of our applications in. Most of them were accepted. There was $20.8 million total that we applied for. Of that, $3.4 has been received. There is some interest that comes along with that as well, which brings us up to about $3.6. That came in 2Q. It's included in our 2Q guidance and in our full year guidance, therefore, as a result.
However, we have not included the remaining, the difference between the total and the $3.4. If and when that comes through, because there's still questions around it, if and when it does come through, we will recognize that through our financials at that time. We'll also know a lot more about what else is changing in the world. For example, what happens at the end of July when the 122s hit expiration. We'll have a lot more clarity around a number of open questions that exist. We'll give you a lot more information about that with next quarter's earnings because we'll have a more holistic picture. Yeah, we feel pretty good about our position, that we've done everything we can and are hopeful that the rest of the IEEPA tariffs refund will come through.
That's very helpful. I'm seeing that we have one minute left. Is there a topic we should have discussed we didn't discuss here that we could throw in quickly?
Look, we're proud of what we built at Lovesac. We're poised to, as we've said, our ambition is not just steady growth. Even though we'll take it, especially in times of duress like this for the home category, as we continue to kind of watch the world unfold. Regardless of what the macro does or doesn't do, we have plans to double and triple this company. That may sound aggressive, but that's our ambition. It's going to take years to unfold, I'm sure. The real momentum on that will begin toward the end of this year as we have our most prolific year of product launches ever in the living room, where we already have great traction leading into this new room launch, early next year, and we're really excited about everything that will come with that.
Well, I very much appreciate your time. It's always great seeing you. Thank you for joining the conference and congrats. Best of luck.
Thanks for having us.
Thank you, Brian. Nice to see you. Bye