Lovesac Co (LOVE) 2026 Q3 法說會逐字稿

Greetings. Welcome to Lovesac third-quarter fiscal 2026 earnings call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Caitlin Churchill, Investor Relations. Thank you. You may begin.

Thank you. Good morning, everyone. With me on the call is Shawn Nelson, Chief Executive Officer; Mary Fox, President; and Keith Siegner, Chief Financial Officer.

Before we get started, I would like to remind you that some of the information discussed will include forward-looking statements regarding future events and our future financial performance. These include statements about our future expectations, financial projections, and our plans and prospects. Actual results may differ materially from those set forth in such statements.

For a discussion of these risks and uncertainties, you should review the company's filings with the SEC, which includes today's press release. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today, and we undertake no obligation to update them, except as required by applicable law.

Our discussion today will include non-GAAP financial measures, including EBITDA and adjusted EBITDA. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. A reconciliation of the most directly comparable GAAP financial measure to such non-GAAP financial measure has been provided as supplemental financial information in our press release.

Now I would like to turn the call over to Shawn Nelson, Chief Executive Officer of The Lovesac Company. Shawn?

Good morning, everyone, and thank you for joining us. I'll start by sharing a high-level overview of our third quarter results, provide an update on our Designed for Life product platforms and touch on our views for the remainder of the year before passing the discussion over to Mary Fox, our President. Mary will discuss our tailored customer acquisition engines and key growth enablers. Finally, Keith Siegner, our CFO, will review our financial results and provide more detail on our Q4 and fiscal 2026 outlook.

Beginning with our third quarter, macro conditions proved a little more challenging than we anticipated with consumer uncertainty leading to meaningful choppiness week-to-week, particularly in our lower dollar volume transactions. As a result, third quarter net sales were $150.2 million, about $1 million below our guidance range.

While we are not happy with this outcome, it's important to note that our focus on secular growth initiatives such as new products and the beginnings of a major evolution in our marketing tactics enabled a slight year-over-year growth in net sales, reflecting market share gains as compared to our category, which we estimate declined approximately 2% for the comparable quarter and 4% year-to-date.

Adjusted EBITDA and net loss for the third quarter were within our guidance ranges, pressured by a 240 basis point decrease in gross margin resulting from increases in tariffs and transportation costs as well as increased promotional intensity, partially offset by price increases, cost savings and vendor concessions.

Total omni-channel comparable net sales decreased 1.2% for the quarter, offset by contributions from new and known comp touch points. Our balance sheet remains strong with inventory and net cash at healthy levels. And as Keith will outline later, we remain on track to end the fiscal year with a more optimized inventory carry versus the prior fiscal year and a very solid net cash balance with no borrowings.

We've remained active on bringing Designed for Life product innovation. You all know about our new Snugg platform already. It has become an important part of our sales mix and in-store presentation. During the quarter, we also successfully launched our national advertising campaign for Snugg, which Mary will talk more about in a bit. But there was even more news for fourth quarter and the holiday season.

We launched an exciting extension to our wildly successful accent chair line with the PillowSac Chair Jr. It delivers the same cloud-like comfort, premium materials and versatility, now thoughtfully scaled for smaller settings from living rooms and apartments to bedrooms and reading nooks. We also introduced a fourth arm option for Sactionals, the Swept Arm, taking a nod from the Snugg, where Swept Arm has been the runaway favorite style. Sactional customers asked and we responded.

The instantly popular Swept Arm brings a more modern aesthetic to the platform. A refresh of our Sactionals quick ship cover assortment and on-trend limited edition fabrics for Sacs and Footsacs round out a busy few months of new product launches at Lovesac.

Let's spend a minute on our brand evolution and strategic shifts. First, last quarter, we discussed the initial learnings from our brand evolution refresh and the implications for our strategic road map. We knew we needed to sharpen and focus our positioning to not only allow us to confidently extend this brand further, but also deeper into the categories where we already have strength. We are rebuilding our marketing playbook on the foundations laid by our new team, which should enable us to compete more vigorously for share in existing and new rooms.

Second, now four years into the category declines with uncertainty around the consumer remaining, it's more clear than ever that prudence mandates we should be pragmatic about modeling upside potential in this macro backdrop or even from secular initiatives in this context in the near term. We will not base our plans on expecting any recovery from the consumer or the category in the near to medium term.

Combining these two considerations, we believe the optimal approach over the next few quarters, the strategic sweet spot is to harvest the brand that we've built to date, shoring up our place in the living room and aiming to take even more share in these realms while reinforcing our brand equity.

We see massive opportunity to ignite the core Lovesac business through Designed for Life product extensions and by leaning into the green shoots we're seeing in our customer acquisition engines coming off the brand evolution work already.

So what does this mean? I'm excited to share more details because we expect calendar '26, our fiscal 2027, will be our most prolific year ever for new product introductions and other announcements and in the bull's eye of our core positioning. The initiatives we're planning are meaningful to our customers' quick to market and demand relatively few costs ahead of their launch.

Here are just a few. We plan to unlock this Snugg Sofa, our newest platform, through platform extensions that directly address early consumer requests. In short, the Snugg can do more literally and figuratively, and it will this coming year.

We'll also optimize our channel experience leaning into outsized early success of the Snugg in our digital and Costco channels. We plan to unlock Sactionals as the workhorse for Lovesac through a full redesign of core inserts that will enable domestic manufacturing, add features and benefits our customers will love and give us the opportunity to refresh our portfolio of patent and IP protections around Sactionals, even better Sactionals manufactured using new materials that work seamlessly with all our previous versions, This is a really big deal, and it represents significant work by our talented in-house and some external partners.

This has been underway for a while now but was accelerated given all the tariff noise this year. To be clear, we are well along this path already, working with existing and some new vendors, and believe we can begin domestic manufacturing for our core SKUs this summer at a gross margin neutral basis and, potentially, even margin favorable basis.

This is possible because of a unique Lovesac competitive advantage, high volumes of limited SKUs. This unlocks automation and it serves as the basis for our new product development approach in all realms. Made in the USA Sactionals, better and hopefully cheaper is the goal, just a few months away.

With an expanded Snugg platform designed to lower the entry point into our brand, we are excited to announce a new high-end sectional sofa platform that we expect to launch midyear coming up. This is distinct from Snugg or Sactionals. It will have a different aesthetic and even larger footprint and different use case than Sactionals or Snugg to target a higher-end consumer, where we are seeing the healthiest demand right now. We also believe it can help anchor from above the value proposition for Sactionals, leading to increased consumer appreciation for our workhorse product that's priced right down [ the ] now.

Next, we plan to reduce friction for our customers by removing the single biggest reason for not purchasing Lovesac according to their feedback: lack of tiered delivery and setup options. We just launched scheduled room of choice delivery in November, which has been very well received. Next, we plan to beta test for white glove delivery and assembly by Q1 with a formal launch as soon as possible thereafter, driven by measurable customer demand and providing new revenue opportunities for Lovesac.

We have even more introductions to drive secular growth plan for this coming year that we aren't quite ready to share yet, leveraging both of our superpowers, designed for Life products and our tailored customer acquisition engines. You'll hear more from us in the coming quarters.

As part of this strategic direction, we've decided to shift the launch of our next new room a few months into early calendar 2027. This gives us the opportunity to prioritize a set of exciting near-term initiatives that we believe will drive more efficient growth and profitability through this challenging macro environment. It also gives us the time needed to prepare for a major category-defined launch of this new room, one we intend to bring to market with a significant splash.

Please note that as part of this clear focus on winning the living room and igniting the core, we are temporarily slowing the expansion of physical stores in the coming year. This will allow us to set the optimal omni-channel strategy for a multiroom brand with the Lovesac Store of the Future as an essential element of our customer acquisition engine superpower over the years to come.

Regarding our outlook. Beginning with the macro, the slight improvement in category trends has continued with low to mid-single-digit declines of late as compared to mid-single-digit declines months ago. That said, the weakness has become more pronounced for us in the lower dollar volume transactions, say, below $6,000, which led to the slight shortfall in the third quarter. We've already adjusted our marketing and promotional strategies as a result.

The all-important Black Friday and Cyber Monday holiday weeks have been very encouraging, achieving strong growth already versus last year. However, as mentioned before, the trends have more peaks and troughs in them than in prior years and we also have tougher comparisons coming over the New Year's and January holidays, where we escalated our conversion efforts last year. We are heartened by recent performance for sure, but still choose to maintain an abundance of caution.

Keith will provide our updated guidance ranges in a few minutes. But in short, we estimate this year, fiscal 2026, to be a year of modest market share gains for Lovesac with absolute growth despite a down category and with encouraging green shoots showing now from all of our strategic adjustments being implemented in Q4 and on into the new year.

Shifting gears to leadership and governance. We are thrilled to welcome a new member to our top leadership team this quarter. Jacob Pat has joined us as Lovesac's new Chief Technology Officer. Jacob brings valuable experience that will support the acceleration of our digital transformation initiatives.

In addition, Lovesac continues to broaden and deepen the relevant skills and experience at our Board of Director level. Following the addition of a seasoned global technology leader in Allen Bone this August, H&M, Coca-Cola, and others on his CV, we are excited to have Wan Ling Martello join our Board of Directors quite recently.

Wan Ling's exceptional track record of driving transformational growth where she serves on the Board of Alibaba and previously on the Board of Uber, along with her own deep experience as a top C-suite executive at some of the world's largest and most respected consumer and retail companies. She is an invaluable addition to our Board, and we are proud to have her as an adviser.

Our proven expertise in data-driven resource allocation and digital transformation that drives consumer engagement aligns perfectly with our mission as a technology-driven furniture company. Lovesac is more than the sum of its parts. Lovesac is a brand, a brand that we believe will be the most loved home brand in America in pretty short order and, one day, the most loved brand in America full stop. That's our ambition.

We are inventing and investing steadily even through these tough times for this category while balancing cash flow generation and profitability. Our tall ambition begin with reaching our goal of 3 million Lovesac households by 2030, households that will have ever more Designed for Life products across ever more rooms in the house. We are totally focused and committed to this midterm goal that will produce meaningful growth over the next few years regardless of what happens in the macro.

While our ambitions are grand, we are patient. We recognize the need to evolve our strategies, adapting to the economic landscape and competitive realities of this time. Harvesting the brand we have built to win the living room and the categories we already have so much brand equity in is the right strategy for right now.

Profitable growth and market share gains driven by focused execution sets the perfect stage to bet big on the launch of that new room in early calendar 2027 when the consumer and category are hopefully in a stronger fundamental position to boot.

With that, I'll hand it over to Mary.

Thank you, Shawn, and good morning, everyone. Building on Shawn's overview of our Designed for Life platforms, I'll now focus on our second superpower, our customer acquisition engines as well as our growth enablers that are fueling our momentum.

As a reminder, what makes our customer acquisition engines so powerful, a super powering effect is our ability to leverage different mixes of brand and performance marketing, digital configuration through lovesac.com, incredible showroom experiences, and efficient partnerships to optimal effect by product platform. Done wisely, we can efficiently generate customer awareness, convert that awareness into customers and ultimately build long-term relationships and brand love.

So let's start with branded performance marketing. Quarter three was only the beginning of an evolution in our marketing and media strategy. The first step was to modernize our go-to-market approach and media mix to drive more personalized messaging that better meets consumers where they are meaningfully consuming content.

We were pleased with the initial impact, and some highlights worth mentioning include: culturally relevant campaigns with celebrities like Brittany Snow and Bethenny Frankel, seasonal campaigns like Sac to School, exciting campaigns like our NFL season kickoff featuring New York Giants Superstars, Jaxson Dart and Cam Skattebo. The tail was long with activations with CBS NCIS and nostalgic collab with the Twilight Movie Saga and more.

That said, as Shawn mentioned, in quarter three, we saw more pressure in our smaller and mid-range setups following recent price increases taken to offset the tariff impact. These configuration types tend to track more closely with the middle-income consumer. And what we saw was consistent with broader category behaviors of less trading up and some trading down. This is good timing in that we were able to implement the second step of our marketing evolution in time to address this dynamic for the all-important fourth quarter.

We needed to change approach, focusing more on attracting and converting the customers close to purchasing. This included further shifts out of traditional media formats such as linear TV and towards heavier paid influencer, programmatic digital channels and other engaging digital content to highlight the unique aspects of Lovesac and our value proposition. We are also expanding into AI search and content creation, which can be a material upside for us.

Of course, we reinforce this with compelling discount offers, particularly around smaller dollar transactions and opening price point options. The good news is that the combined Black Friday, Cyber Monday holiday period achieved strong growth to last year. Now there's still quite a bit of the quarter to go, including New Year in January, but it's an encouraging start.

Second is our digital configurations and how we bring Lovesac to life online. This is an important topic, one with significant momentum as we entered the fourth quarter. The website is our single biggest and most accessible store, and we have been aggressively updating and adapting our approach, following the reorganization of the marketing and e-commerce teams in September and the rebuilding of our marketing playbook. In short, we've built a more cohesive and responsive digital ecosystem. We set up more powerful destinations across the site, including the home page, seasonal guides, bundles that resonate and more.

These destinations create more relevant entry points as customers behind actively exploring options for their homes and provide clearer pathways for discovery of upgrade options and more products.

This is supported by a strengthened media and advertising strategy. We expanded our digital presence and broadened our tactic mix with new MBA placements through FanConnect and Reddit product ads. We introduced Roku showcase and pause formats, reinforced YouTube content and keyword alignment, expanded programmatic reach, activated AI-powered search optimization, and delivered refreshed holiday CRM creative.

As an example of effect and within the small and midrange configurations, we saw encouraging signs as the quarter progressed. What began as mid-quarter softness narrowed in the final weeks of quarter three and turned to growth as we entered the fourth quarter.

Momentum strengthened further through Cyber 5, where we saw the strongest Cyber Monday in our history, well ahead of both last year and the year before that. And this is a testament to the impact. Lastly, Snugg remained a standout performer online, delivering meaningful sequential growth and reinforcing the strong customer response to the platform online.

Third is our showroom experience, the physical brand amplifiers of our Designed for Life products. In quarter three, we launched our new customer demonstration architecture, the brand tour, a standardized, repeatable walk-through designed to guide customers through the value versatility and performance of our various products, including Snugg, which has been fully deployed in time for the holiday selling season.

Early indicators show that the brand tour is helping associates create more impactful demonstrations and deepen customer understanding while amplifying our Designed for Life story across all stores. As a result, customer satisfaction in the store has steadily improved this year and remains significantly higher among customers who experienced a demo, indicating that the tour is contributing positively to the overall experience.

And then finally, complementing our showrooms is our partnership model, and we enhanced our Costco partnership extensively in quarter three. Our bundled offers now include the Snugg Sofa and an accent chair, Sactional's reclining seats and five new fabric offerings.

We deployed upgraded roadshow fixtures, enabling live demonstrations of StealthTech capabilities, which is an important differentiator that sets us apart from other seating at Costco. We improved the digital shopping experience at costco.com, leading to accelerating trends there. And last, we expanded Lovesac's reach in Hawaii and Alaska, which positions us for additional market share gains.

When combined, these four elements of our customer acquisition engines creates an unmatched customer experience that drives brand love and enables long-term relationships, and we are reinforcing this further with our customer-facing services. Since quarter two, our resale program Loved by Lovesac, has now expanded to a total of 27 states. This expansion enhances customer lifetime value and creates new revenue opportunities, all while continuing to support our mission of delivering products that are built to last and adaptable to our customers' lives.

In parallel, we've also made significant progress towards bringing a formal trading program to market. We are on track to introduce an internal pilot for associates during quarter one next year and hope to roll out the trade-in program to customers starting in quarter two.

Perhaps even more importantly, we are very happy to share that we have launched the first wave of enhanced delivery and assembly services in November. Customers can now schedule their delivery with placement into their room of choice for a reasonable fee.

Furthermore, we are now also testing the second wave, which will be white glove services inclusive of assembly in their home. We're hopeful that these services make it easy and easier for anyone and all customers that love Lovesac products and love them for years to come.

Key to sustaining our long-term profitable growth are our growth enablers with our supply chain playing a pivotal role. As I shared before, our supply chain is a competitive advantage, a true strength. Today, I'd like to focus on our path to manufacture the bulk of our products in the United States in the medium term.

First, we are on track to begin domestic production of Sactional insert pieces next summer. Based on progress to date, we believe that we can do this with gross margins that are neutral, potentially favorable to current levels.

How are you delivering this, do you ask? Over the past year, we have completely redesigned the Sactional chassis using a mix of new materials to make it even more durable and highly automatable. There simply aren't direct competitors with limited SKU assortments and strategies that enable this approach, which is what creates this opportunity for Lovesac.

The redesign enabled a series of enhancements that improved comfort, functionality and ease of assembly, all of which are of real value to our customers. These redesigns also afford us the opportunity to generate new defensible patents and IP to help ward off competition. And of course, the new Sactionals will be reverse compatible with existing products and future compatible with inventions we're currently cooking.

We have three excellent manufacturing partners that hope to cover different geographies of the United States in order to provide efficiency and distribution. The better we get at making products closer to our customers and, therefore, shipping them over shorter distances should reduce required weeks of stock on hand and transportation costs.

We are very grateful to our teams that have worked so hard on this initiative. Domestic, automated, efficient manufacturing has long been a goal at Lovesac, and seeing it close to reality is so exciting. Doing it in an economically advantageous way is even better.

And with that, I will hand over to Keith to share more on our financial performance and outlook. Keith?

Thanks, Mary. Let's jump right into a quick review of the third quarter, followed by our outlook for the rest of fiscal 2026. As we begin with performance metrics, please note that all references to the third quarter refer to fiscal 2026 unless otherwise noted.

Net sales increased $0.3 million or 0.2% to $150.2 million in the third quarter compared to the prior year period. Showroom net sales increased $11.7 million or 12.8% to $102.7 million in the third quarter compared to the prior year period driven by the net addition of 17 new showrooms partially offset by a decrease of 1.2% in omni-channel comparable net sales. Internet net sales decreased $7.6 million or 16.9% to $37.3 million in the third quarter compared to the prior year period.

Other net sales, which include pop-up shop sales, shop-in-shop sales, open-box inventory transactions and the Loved by Lovesac program decreased $3.8 million or 27.3% to $10.2 million in the third quarter compared to the prior year period.

The decrease was primarily attributable to the company's decision not to engage in any barter transactions during the current period and the closure of the company's Best Buy shop-in-shop locations as a result of the discontinuation of our partnership with Best Buy.

By product category in the third quarter, our Sactional net sales decreased 1.0%, Sacs net sales decreased by 9.0% and our other net sales, which includes our new Snugg platform, decorative pillows, blankets and accessories increased 12.3% on over the prior year.

Gross margin decreased 240 basis points to 56.1% of net sales in the third quarter of fiscal 2026 versus 58.5% in prior year period, primarily driven by increases of 320 basis points in inbound transportation and tariff costs, 20 basis points in outbound transportation and warehousing costs, partially offset by an increase of 100 basis points in product margin driven by price increases, cost reduction initiatives and concessions from our vendors in response to changes in the tariff environment.

SG&A expense as a percent of net sales was 49.9% in the third quarter of fiscal '26 versus 47.9% in the prior year period. The increased percentage is primarily related to higher payroll costs, license and registration fees, rent and other overhead costs.

The increase in selling, general and administrative expense dollars was primarily related to increases of $4.1 million in payroll, including an out-of-period $1.6 million expense pertaining to employee benefits in prior periods, $1.0 million in licenses and registration, $0.7 million in rent and $0.8 million in other overhead costs. The increases were partially offset by decreases of $3.0 million in legal and professional fees and $0.4 million in equity-based compensation.

Rent increased by $0.7 million related to a $0.8 million increase in rent expense from our net addition of 17 showrooms, partially offset by a $0.1 million reduction in percentage rent. We estimate nonrecurring incremental fees associated with the restatement of prior period financials were approximately $1.2 million in the third quarter.

Advertising and marketing expenses increased $1.1 million or 5.7% to $21.1 million for the third quarter compared to the prior year period. Advertising and marketing expenses were 14.0% of net sales in the third quarter as compared to 13.3% of net sales in the prior year period. Operating loss for the quarter was $15.8 million compared to $7.7 million in the third quarter of last year driven by the factors we just discussed.

Before we turn our attention to net loss per common share and adjusted EBITDA, please refer to the terminology and reconciliation between each of our adjusted metrics and their most directly comparable GAAP measurements in our earnings release issued earlier this morning.

Net loss for the quarter was $10.6 million or negative $0.72 per common share compared to a net loss of $4.9 million or $0.32 per common share in the prior year period. During the third quarter, we recorded an income tax benefit of $5.0 million as compared to $2.1 million in the prior year period. Adjusted EBITDA loss for the quarter was $6.0 million as compared to adjusted EBITDA of $2.7 million in the prior year period.

Turning to our balance sheet. We ended the third quarter with a healthy balance sheet to provide substantial flexibility for Lovesac to invest in growth to enhance long-term value creation for shareholders. We reported $23.7 million in cash and cash equivalents while retaining $36 million in committed availability and no borrowings on our recently amended credit facility.

First, we feel very good about both the quality and quantity of our inventory and our ability to maintain industry-leading in-stock positions and delivery times and believe we can end fiscal '26 with meaningfully lower dollars of inventory than that at the end of fiscal '25. Second, nothing has changed in our strategy to allocate excess capital opportunistically with a focus on long-term value creation and enhancing returns on capital.

Given significant uncertainty and macro backdrop related to tariffs and consumer spending over the near term, we did not repurchase any shares of our common stock during the third quarter. Year-to-date, we've repurchased 6.0 million of our common stock outstanding and we have approximately 14.1 million remaining under our existing share repurchase authorization. Please refer to our earnings press release for other details on our third quarter financial performance.

So now our outlook. As Shawn mentioned, we experienced very modest improvement in category trends in the fiscal third quarter and our current outlook for the fourth quarter looks more like a negative low to mid-single-digit category decline.

While we're very encouraged by the demand growth we achieved through the important holiday period, we're cognizant of our more difficult compares over New Year's in January and also the lack of any sustained trend in consumer spending week-to-week in recent months.

What remains clear is the consumer is price-sensitive and deal focused, and we've raised our discount plans to increase competitiveness, particularly for the below $6,000 transaction. Combined with our caution on sales for the remainder of the quarter, this places some incremental pressure on gross margin versus what we originally anticipated for the fourth quarter.

Specifically for the full year, we estimate net sales of $685 million to $705 million. We expect adjusted EBITDA between $37 million and $43 million. This includes gross margins of 56% to 57%, advertising and marketing of approximately 12.5% as a percent of net sales and SG&A of approximately 40% to 41% as a percent of net sales.

We estimate net income to be between $2 million and $8 million. We estimate diluted income per common share in the range of $0.15 to $0.49 and approximately 16.2 million estimated diluted weighted average shares outstanding.

For the fourth quarter, we estimate net sales of $236 million to $256 million, representing low single-digit revenue growth at the midpoint and fully representative of all our near-term plans for tariff mitigation. We expect adjusted EBITDA between $51 million and $56 million.

This includes gross margins of 57.5% to 58.5%, advertising and marketing of 10% as a percent of net sales and SG&A of 27.5% to 28.5% as a percent of net sales. We estimate net income to be $30 million to $36 million. We estimate diluted income per common share to be $1.88 to $2.22 with 16.2 million diluted weighted average shares outstanding.

We aren't providing full year fiscal '27 guidance today. However, to expand on a comment Shawn made earlier, as part of our strategy to win the living room by igniting the core over the next several quarters, we plan to slow net showroom expansion to approximately 10 net openings in fiscal '27.

In summary, we're balancing prudence and efficiency with our belief that it's essential to stay focused on the big picture. That's the massive long-term opportunity for tremendous value creation for all Lovesac stakeholders.

We're building the Lovesac brand and investing in new product innovation that spans style, function in new categories that supports a powerful multiyear secular growth outlook with macro upside exposure as icing on the cake.

With that, over to you, operator.

(Operator Instructions) Thomas Forte, Maxim Group.

Great. Thanks. So one question, one follow-up for me, and best of luck in navigating a challenging environment. On the Loved by Lovesac recommerce, can you talk about what is the discount to the consumer? So how much are they able to save versus buying the product brand new? And then what's the gross margin to Lovesac on the recommerce sale?

Hey, Tom. Good morning. Thank you for the question. So yeah, so the Loved by Lovesac, the way we're positioning is around about 20% to 25% discount level to what you'd typically be able to receive if you were buying at full price or at a discount level. We have two grades for Loved by Lovesac. So it is basically practically new and then good in terms of the conditions. So there are two different tiers in terms of the pricing.

And I think, for us, as we're rolling it out, we're now in 27 states, and we're really starting to see the interest build. Customers obviously know that our product lasts for a lifetime.

I think the second piece that we're excited about is obviously rolling out this path in terms of being able to resell was really just building the processes so that we can unlock trade in next year because we believe that will be incredibly powerful as people want to change covers, buy in some of the new innovations such as the recliner and so forth. So look forward to sharing more of that from next year.

Just to add one thing. This year has largely been about building the infrastructure and capabilities to get the program to a broad base of folks and to test all of the elements of it for proper functionality. Now that we're in 27 states with a few more still to come, but with the lessons, we'll be able to really lean into this effort and expand it.

We've got some other things we're considering to drive this piece of our business even further and put ourselves into a great position to move meaningful volumes through this, especially right ahead of us launching the trade-in program to boot.

Michael Baker, D.A. Davidson.

Thanks. And I think Tom didn't get to ask as a follow-up. But anyway, I will -- let me ask. I know you're not giving guidance for next year, but a lot of changes for fiscal 2027 versus what we were previously thinking. You're pushing out the line to the new room, you're cutting back on showrooms, but you're launching a new sofa. It sounds like you could be a little bit more promotional.

Can you just help us with some of the P&L impacts we should expect next year in terms of how that all impacts sales, costs, margins, et cetera, more domestic manufacturing? Again, a lot of changes for next year. Give us some help, please.

So I'll kick this off and then I'll pass it over to Shawn to talk a little more qualitatively. Look, Mike, very fair question. We're really in the midst of landing the fourth quarter and ending up this fiscal year and in the process of our formal AOP planning for fiscal '27 at this point.

Give us a couple of months and we'll give you a lot more details. Like Shawn and Mary both mentioned earlier, we're very pleased with the initial progress, what we've seen from these adjustments that we've seen in the fourth quarter. But we'd need a little bit more time.

Shawn will get into some of the qualitative stuff, but the key principle, I think, to this is we believe that during a protracted period of uncertainty in the macro, by focusing on harvesting the brand, we can make more money off of the existing infrastructure and products that we have and launching new products that are quick to market and less costly to launch given their proximity to our existing at date.

That seems to be the more prudent way for us. And also, like Shawn said, it gives us even more time to transition into a big splash for the new room launching in early calendar '27 in a material way. So that drives awareness and appreciation right off the bat for that.

But Shawn, what else do you have to add?

Yeah, thank you. Given some of the success we've been seeing with Snugg and the brand refresh as our marketing team is really getting their feet beneath them with a lot of the change that we've been living over the past few months and really seeing green shoots from, we see a path to build a more robust financial situation and cash position leading up to the launch of that new room, which is the position we want to be in when we're really going to swing the bat hard and launch with great gusto.

So it's really just a shift of a few months in practicality. And this new Sactional sofa platform that we are so excited to reveal maybe the next time we speak is something that will fill a different hole in our offering than Snugg has already begun to fill with its introduction.

And there's more to come on the Snugg platform as well. So just as Keith said, a way to build more profitability and strength in our core business as we prepare for that new launch. And we're actually really grateful to see the results from Snugg and also the marketing engine that's been performing quite well over the last little bit with some new tactics. That gives us a lot of confidence that this is the right strategy for the business in the near to medium term.

Fair enough. If I could ask a follow-up. I understand the desire to be prudent for the fourth quarter outlook. But the industry seems like it's better than it was. You're seeing a lot of momentum, strong Black Friday, et cetera.

I get that there's more difficult comparisons but you knew that. So why the lower fourth quarter outlook today than what was implied in your guidance that you gave three months ago, again, if the industry seems to be getting better and you have some momentum? Is it that the industry improvement isn't as -- it's better but not quite what you thought it would be? Just trying to square that circle.

Yeah. So the industry has lots of different nodes and certainly some would say it's getting a little bit better. But at the high end, which is really where we compete, it's worse than the industry on balance. And so it's choppy, it's messy. And look, we did have a very strong Black Friday through Cyber Monday. Record Cyber Monday for us. It's an abundance of caution. We have tough compares coming over the new year.

Back to the industry, for November, it was down 3% but the high end was down 11%, just to make that real for you, right? So that's the backdrop we're operating in. And out of an abundance of caution, knowing that there's some tough compares particularly through New Year, we just want to be prudent. We recognize like very slight miss on the quarter, and that's beyond frustrating for a team that prides themselves on performing and meeting expectations. So that's what it's about for us right now.

Fair enough. Thank you.

Eric Des Lauriers, Craig-Hallum Capital Group.

Great. Thanks for taking my questions. First, I was wondering if you could just provide a bit more color on where the revenue weakness in the quarter is coming from. You mentioned weakness in items under $6,000. Just wondering if you could add a bit more color to that. Is that mostly Sacs or smaller components of the Sactionals? And should this have naturally a greater impact on Internet sales versus showroom? Can you just provide a bit of color on where the revenue weakness is coming from, that would be helpful? Thanks.

Yes. Hey. Good morning, Eric. Thank you for the question. Yeah. So we've seen definitely, I think Shawn referenced earlier, the adjustments we made coming out of Q3 into Q4, so seeing all a big step-up of improvement in the lower-end transaction sizes, which is primarily the small setup fractional.

So big step-up from obviously the decline and the challenge that we faced in quarter three. I think the second piece is we are continuing to see at the high end just a premiumization that really is driving a higher AOV. So they're buying more recliners, more add-ons in terms of storage and even more premium in terms of fabrics as well.

And then I think the last piece, and I think I touched on it earlier, Heidi has been leading a lot of transformation in the marketing team, including putting new leaders in place and in two areas. One is around on the website, and they've been doing a huge amount of work really overhauling the configuration experience to really be able to drive much better excitement around the holiday gift guide. And the web is performing at a much higher growth rate to the total company in quarter four. So you're seeing a lot of that benefit that's coming through.

And then I think Shawn talked about some of the new innovations, whether it be PillowSac Jr. accent chair and the Swept Arm and various other things, that's also helping to bring some more energy to our growth. So we're going to continue to be able to drive our platforms with the innovation and the excitement.

We brought in some great new covers, for example, and the colors that are new are on fire. So as we continue to drive that excitement and then obviously get the website really to be able to acquire customers at a faster rate because it is our most efficient store, that's really what we've seen the strength through December for this quarter.

All right. That's helpful. I appreciate that color. And then just a follow-on for me. When you look at the marketing overhaul here, could you just give us a sense of how long you expect this to take?

How long you expect to wait to see the impacts of this? Presumably, you're already seeing some impacts on digital. But just wondering what other time lines you're thinking about and we should be thinking about as it relates to this marketing shift and the ultimate success there? Thanks.

Yeah I think -- yes, thank you, Eric. I think it's two parts. I think first is real time and near time, it's happening right now. So as we talked in terms of shifting out of traditional media formats even more aggressively than ever before such as linear TV, moving a lot more to heavier paid influencers, we did a lot of that towards the end of quarter three into quarter four, a lot more around programmatic digital channels.

That's all real time. That's happening right now, and we contribute the quarter four performance to obviously a lot of those shifts. So that's really been happening real time.

Then in addition, as I touched on the website performance, that really was turning in a matter of hours and days as the team pivoted and made some of those adjustments. So that is all in Q4.

I think the second horizon, as Shawn has talked about brand evolution and really how do we bring the brand to life in terms of the storytelling, about the value, the versatility of the brand and then how do you drop down into the platform, you're going to continue to see more from Heidi and the team as we get into quarter one and quarter two next year as we really bolster up that storytelling and really claim the territory that is uniquely Lovesac that no one else has. So you're just going to continue to see us driving all of those opportunities.

And then I think, Shawn, maybe you want to touch about our focus on winning in the living room and particularly Snugg's performance in on e-commerce, which has been super strong.

Yeah, no doubt. As we've referenced, we think of ourselves as having these two superpowers, Designed for Life products paired with tailored customer acquisition engines, and on the Designed for Life product side, the Snugg is becoming a really important part of our portfolio.

We think while it is still ramping, we believe that it will, as the platform evolves even over this coming year, help us fill in some of that weakness that we're seeing at the low $6,000 transaction realm. So even though we're calling out this weakness at the low end, simultaneous Snugg is ramping. But like any new product, it just takes time.

And so we're really pleased with the results we're seeing. It tells us that the Lovesac customer wants products from Lovesac. It's not just the specific attributes of Sactionals. And that's led us to yet another innovation in the sofa sectional realm that we think, again, will help us fill in the assortment and compete more fully against those incumbents, who many of them have dozens and dozens of sofa sectional lines. So while we have no intention of doing that broadly, we are starting to really understand the opportunities we have in that realm.

On the marketing side, as Mary said, we're seeing just some really exciting performance on new tactics that we have not exploited before. We had a marketing playbook, speaking of these customer acquisition engines, that got us to where we are. And we're certainly grateful to have experienced all the growth that we've experienced over this last decade. But needless to say, the world has evolved a ton. Our new CMO is more than capable.

And so those are the two rounds that we're focused on. Those two superpowers will continue to drive the business. But it's a time of great innovation at Lovesac both on the product side and the marketing side. And thankfully, we're seeing those green shoots in the business. And I think it was evidenced by our performance over Black Friday and Cyber Monday.

So it's a mixed bag at this very moment given the macro, but we'll continue to look forward to a really exciting year at Lovesac. Next year will be, by far, the most prolific year of innovation launches ever. and we're excited about it.

All right. I appreciate the color. Thank you.

Matt Koranda, ROTH Capital Partners.

Hey, guys. Good morning. I just wanted to make sure I understood the cadence of demand during the quarter and then into the fourth quarter here. So maybe just at what point in the third quarter did demand get worse? It sounded like the middle point of the quarter. Are there any regions where you saw a concentrated weakness? And then the drivers of improvement into the fourth quarter, it sounds like promotions and sharper on marketing.

But maybe just correct me if I'm wrong there. And then are comps actually positive quarter-to-date? I Just want to make sure that -- I mean, giving the sense that, I guess, Black Friday and Cyber Monday were strong. But is the full quarter-to-date comp positive quarter-to-date here?

Hey, Matt. Thank you for the question. Let me start with the second one and then I'll come to the cadence in Q3. So yeah, comps are positive for this quarter and we actually had a strong start to the quarter. That has continued all the way through to today. So I feel very good, as we've all shared in terms of the adjustments that were made in driving the performance in quarter four.

Then to your question, going back to quarter three, we've shared with you Labor Day was good. And then coming out of Labor Day, we've really started to see that pressure. We've obviously taken a second price increase, and that really impacted the smaller-sized orders at under $6,000. And at the same time, customers are facing uncertainty more broadly.

And we really saw that shift down with that impact. I think then as we saw that drop down, we then made some adjustments. So our cadence started to improve towards the end of quarter three, but obviously not enough to be able to make up that loss in the middle part of the quarter.

To your question, did we see any impact regionally? We see a little bit more of a challenging performance in a few states such as Florida and Texas. But honestly, it really is more broadly nationally as we look across the whole place, I think. So then as we moved into quarter four, the adjustments we made both in terms of promo cadence, we simplified. We were bolder, clearer.

But instead of having some of the more discrete personalized offers, we just went full throttle with a winning promotion. And you know there were many other companies that are promoting up to 80% off. So we knew we needed to be strong. We wanted to win, and we did win based on the November results that just came out yeahterday from Bank of America.

And then the second point to your -- what else shifted was just the optimization of the media strategy, trying to really focus also on that middle-income consumer to be able to get them to convert. And again, just pleased to see the step-up of that $6,000 and under order performance really moved back up from where we were in quarter three.

Okay. Very clear. Thanks, Mary. And then on the gross margin outlook, I guess what's driving the softer outlook in the fourth quarter that's implied here? Is that incremental pressure from the promotions that you need to run to induce conversion? What's the tariff pressure also that's factored into the end of the year here?

Yeah. Matt, it's actually quite straightforward versus our prior expectations. It's the incremental need for a step-up in promotions to remain competitive, particularly as we target the below $6,000 transaction as well as some deleverage against fixed costs like warehousing and things like that given a lower absolute level of sales. That really is the difference between our prior expectations. Hopefully, that's helpful.

Yes. I'll leave it there, guys.

Brian Nagel, Oppenheimer & Co.

Hey. Good morning. The first question I want to ask, just with regard to the reshoring comments, and I know, Shawn, we've talked about this for a while now, plans for Lovesac to bring more manufacturing back to the United States. So it seems the conversation suggests that it's happening and happening aggressively.

So the question I want to ask is, I mean, if we think about the model for Lovesac, the comment suggests it should be neutral-ish to, I guess, gross margins or gross profits. But I mean, what would be the longer-term benefits to the Lovesac model with bringing manufacturing back to the US?

Yeah. Great question. Thank you. To be honest, this is the initiative that perhaps we're most excited about. We believed for a long time that the unique nature of our products and the demand that we've created, we're doing better than $600 million a year in seats and sides, those should be manufactured more automatedly, closer to the consumer, shipped over shorter distances both for efficiency and, of course, to drive sustainability, which we're passionate about. We're making that real this summer.

And it's been a long project, a difficult project. It's required heavy engineering, reengineering of product from a materials standpoint. So the long-term benefits are myriad. Yeah, when we say neutral, we're targeting Sactionals cost. We're trying to beat -- at least meet but even beat Sactionals cost on an apples-to-apples basis pre-tariff is our goal.

Now we won't promise that at this moment, but that is our internal mandate. And I think we're going to get there. So the long-term benefit is more stable pricing, better product, again, more efficient supply chain, shipping over shorter distances, more reliable, not subject to everything from pirates to hurricanes to shipping container space, what have you, particularly over this past decade since the tariffs began to throw everything up in the air in 2018, which is the better part of this decade now.

It's been an extremely volatile international landscape. And rather than wait to be kicked out of the nest again, we're completely out of China at this point pretty much. And we took that note pretty early compared to some. But rather than play this hopscotch game around the globe, this is the path that we've taken. And thankfully, it's working out. Like we have line of sight to this being successful.

Finally, so from a gross margin standpoint, this will have ideally a positive impact on our P&L. But then there's the warehousing and inventory carry impact as well. You can only imagine. At this moment, there are probably 400 containers of Sactionals or what have you, maybe it's -- a ridiculous amount of product between work in progress, on the water and then, of course, in our warehouse that can be mitigated tremendously by manufacturing onshore, again, using these new materials.

And then finally, the Sactionals themselves are going to improve. Like this is not hyperbole. This will be a better product made in a more robust way that will have some new features that they will be completely groundbreaking in the world of sofa sectionals, one of one.

And they are fundamental improvements that no one in this industry has ever solved or even conceived of solving, and our platform is going to make that possible. And I can't reveal what that is yet but we think it's a big deal.

We think it will make us way more competitive, let alone have these positive impacts on our P&L, our operations in the year. So we're just super proud of the whole team that's made this happen. And intellectual property, we've got some new patent work coming off of it as well. So this is the most exciting thing happening in Lovesac in my opinion.

Thomas Forte, Maxim Group.

Great. Thanks for taking my follow-up. Real quick. Can you talk about your gross margin strategy on entering new rooms, meaning the new products should be comparable to products to date from a gross margin standpoint? Or there may be a situation where you promote heavily initially? Or any other reason why the initial gross margin would be lower than ramp over time?

Yeah. I think, Tom, thank you for the question. So our target and everything that we've been working internally is that we do want to maintain the gross margins that we've been proud to achieve as we enter into the new rooms. So the team have been very hard at work.

We've been looking at a lot of product and reviewing and challenging both in terms of the customer attributes but also the manufacturing efficiencies, leaning in, in terms of also production in the US, which also will obviously give us some benefit. So for us, we see this as being able to maintain the gross margin levels that we've seen.

And actually, Shawn talked about the excitement as we think about reimagining the inserts. There is going to be so much benefit in the new room in terms of just having that domestic product being manufactured, getting it to customers even quicker and managing our inventory, let alone just the awesome product that we're getting to see with the teams. But Shawn, I don't know, anything else you want to add on the new room?

Look, our goal is to continue to target these high 50s gross margins. You've seen that fluctuate over the past number of years that you've been tracking us, really always between 55% and 60%. So that's the place we think this business should be at. It puts us definitely at the high end in our industry.

Of course, speaking really candidly, we don't believe that going much higher than that is prudent for this category. It leaves us further open to competition, copycats, who knows, leaving too much meat on that bone, right?

So it's a delicate balance. But our point of view has not changed and the new room doesn't change it for us. And look, we expect to compete at the higher end of things with very practical product that can do all the things that you have grown to expect -- that consumers have grown to expect from Lovesac and perform the same way from a quality standpoint, features and adaptability standpoint, everything Designed for Life represents.

But great question. And of course, we're super excited to get there. But we just have so much opportunity in this coming year to lean into the core and the strength that this brand already have and really harvest some of that value.

Look, we're the most prolific advertiser of couches on the planet, delivering the best, most versatile couches on the planet. That's what we're known for. And so this is really, we think, safe approach to the coming year in this choppy environment while giving us opportunities to drive revenue, drive growth, and protect that gross margin. And so that's the foundation we want to be on when we launch that new room. That's what all of this is about.

Excellent. Thanks, Shawn. Thanks, Mary. Thanks, Keith.

This will end our question-and-answer session. I would like to turn the floor back over to Shawn for closing remarks.

Yes. Thank you so much to all of those investors, shareholders, stakeholders who supported Lovesac and, of course, to our tireless Lovesac team who continues to fight this crazy macro environment to deliver great results. We're looking forward to the coming year.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.