Lovesac Company Aktie

Thank you. 2027 earnings conference call At this time, all participants are in listen-only mode. The question and answer session will follow the formal presentation. We ask that you please limit yourself to one question and one follow-up. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Colton West, with Investor Relations.

you. You may begin. Thank you. Good morning, everyone. With me on the call today is Sean Nelson, Chief Executive Officer, Mary Fox, President, and Keith Signor, 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 discussion of these risks and uncertainties, you should review the company's filings with the FCC, 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 Sean Nelson, Chief Executive Officer of the Lovesac Company. Sean?.

Good morning, everyone. Thank you for joining us today. I'll start our conversation by sharing a brief review of our strategic roadmap. Then I'll provide a high-level summary of our first quarter fiscal 2027 performance. finally, I'll discuss exciting updates on our strategic initiative. Mary Fox, our president, will then take you through our customer acquisition engines, operational initiatives, and key growth enablers. Finally, Keith Signer, our CFO, will dive deeper into our financial results and provide additional detail on our outlook for fiscal second quarter and the remainder of fiscal 2027. Before getting into the core specifics, I want to begin with the broader strategic landscape. As I believe the operating environment we find ourselves in today increasingly favors differentiated brands with disciplined execution, structurally advantaged product platforms, and enterprises intentionally focused on building long-term customer relationships.

That is exactly what Love Sack has spent years architecting and operationalizing. As I've shared in the past, we are evolving from a product-driven company into a multi-platform, multi-room lifestyle brand. A brand we believe will become America's most loved home brand and, over time, one of its most popular. and the most loved brands. That is what we build our strategy and execution agenda around. are not trying to compete through endless assortments, seasonal replacement cycles, or trend-driven merchandising. Instead, we are building long-duration product platforms designed to evolve with our customers' lives over years and decades. products that are built to last and designed to evolve. Designed for life is not simply a tagline for us. It's an engineering principle. the product philosophy.

And increasingly, it is becoming a broader emotional framework for how customers connect with the Love Sack brand itself. Context is important here. The world offers static solutions to dynamic problems, but this doesn't work. Why? It's simple. People's lives evolve, their homes evolve, their families evolve. That is exactly what our Design for Life ecosystem is built to do. Over the next four quarters, you will see us bring this ethos to market. First, through the enhancement of our offerings for the living room, and second, through our planned launch of a portfolio of and relevant products for a new room of the home in calendar 2027, our fiscal 2028. Importantly, our unique approach to product philosophy is resonating within a category that remains pressured and highly promotional.

During the fiscal first quarter, once again, our teams rose to the challenge, delivering market share growth and with financial results in line with our guidance. sales for the quarter decreased approximately 0.2 million or 0.1% versus the prior year period against a furniture category that declined 2.2% and high-end furniture, which declined by 5%. Operationally, we also continue to see encouraging proof points that the platform model is resonating. We saw significant momentum in our larger configurations, showing that the customer is willing to trade up if the value proposition is right. Reclining seat continues to outperform our expectations and attachment rates have remained strong at nearly one out of every three configurations getting a recliner. Snug, which was still less than a year old, continues to broaden our reach into comfort seating and smaller space living while reinforcing the same principles of comfort, durability, maintainability, and flexibility that Lovesac has become known for. 80% of Snug customers are new to Lovesac. our thesis that we could expand our customer appeal while minimalizing categorization. Equally important is that nearly half our snug sales are through our e-commerce channels. showcasing our ability to develop digital first products that can win profitably in those channels. These are not isolated product signals.

They are proof points that design for life product platform attachment is real and that our solutions solve real customer pain points in ways that traditional furniture just can't. To that end, we are proud to share that Love Sack moved up two places in Furniture Today's top 100 retailers list. the 17th largest furniture retailer in the country. And what's most exciting to me is how that is achieved with substantial greenfield opportunity ahead of us. Our first quarter need the momentum in building the substantial foundational work around our broader brand evolution strategy. This work helped clarify product hierarchy, merchandising strategy, positioning architecture, customer segmentation, and how it all manifests to the consumer under our Here for Life marketing evolution which is rolling out as we speak. At the same time, we are continuing to invest in a modern marketing engine that will turbocharge our brand consideration and reduce our customer acquisition costs, leading to accelerated demand generation and higher customer LTV. Mary will share more about this in a moment.

Because ultimately, we believe the future of Love Sack is not just about selling more couches. It is about deepening the relationship our customers have with our brand, winning their loyalty and their love as we prove our ability to evolve in the same way their lives do. Simultaneously with this brand evolution work, we've made substantial progress on one of our most important structural initiatives. bringing manufacturing onshore to the US. While bringing manufacturing closer to the customer has long been an aspiration for Lovesac, realities of the uncertain tariff landscape, freight volatility, and broader geopolitical uncertainty only reinforced the importance of building a more regionalized, resilient, and flexible sourcing model. But it's not economically attractive to simply make the exact same product in the same basic way just in the U.S. And that's where LoveSec has a differentiated advantage. Our high volume core SKU architecture enables levels of automation and manufacturing efficiency that are difficult for traditional furniture players to replicate at scale.

Even with that foundation, we've redesigned these products from the ground up to optimize automation, improve manufacturability, enhance comfort and functionality. and refresh portions of our intellectual property portfolio, all while maintaining reverse compatibility across every factional ever sold. We remain on track to begin domestic manufacturing of satchel seats this summer. Over time, we expect this initiative to help reduce cost volatility, improve fulfillment speed, reduce dependency on long international freight cycles, and strengthen our ability to deliver the fast customer experiences we are known for. I believe Lovesac enters the remainder of fiscal 2027 from a position of increasing strategic clarity and strength. We know who we are, we know how we're differentiated, and we know where the opportunities are. We entered fiscal 2027 having proven three important things. First, the Love Sack brand is vibrant and the love for Design for Life products is real.

Second, that our customer acquisition engine compounds over time as our design for life platforms expand. And third, that the foundational work completed over the last several years, from the modernization of our marketing engine to our best-in-class website and showrooms network, to supply chain diversification and onshore information, initiatives give us increasing flexibility to navigate a highly dynamic environment while continuing to build for the long term. The macro will be what the macro will be. So our focus remains on building a brand and business that can continue to gain meaningful market share, expanding categories from the mailbox to the backyard fence, strengthening long-term customer relationships, irrespective of short-term market conditions. We are pleased to be in such a position of strength. A strong balance sheet with solid cash position and no debt. lower and well positioned inventory, a clear strategic roadmap and a world-class team executing it. A lot of the work we're doing here in product and marketing and supply chain will start to culminate towards the end of this year, giving us tremendous confidence in the plan and what it will enable ongoing.

And finally, I want to sincerely thank our teams, associates, partners, shareholders, and the entire hashtag Love Sack family for their continued dedication, creativity, resilience, and passion as we continue building what we believe can become the most loved home brand in America.

With that, I'll turn the call over to Mary. Thank you, Sean. Our first superpower, Design for Life product platforms, continue to demonstrate their ability to grow more valuable over time as customers maintain them, adapt them, and evolve them. That dynamic is what powers our economics and long-term value creation potential. LoveSac turns... first-time buyers into long-term relationships, compounding immediate customer acquisition cost payback with lifetime value expanders through a combination of strong brand, unique product and platform innovation, and deep customer engagement. And importantly, it is not theoretical. Launches like Reclining Seat not only drive customer demand, but activate our installed base, reinforcing the flywheel between innovation, new customer acquisition, and durable repeat customer revenue growth. As we expand into new platforms and new rooms, we're confident that our platform and the customer acquisition engines that activate it will position us to further amplify both customer lifetime value and meaningful profitable growth for years to come.

Turning to quarter one, we're proud of our teams for navigating the continued uncertainty of the category and macro environment by staying late in the day These are focused on our key priorities for fiscal 27, igniting the core and building for scale as we turbocharge our customer acquisition engines to drive profitable growth while preparing to launch into a new room of the home over the next 12 months. While trends have been fairly consistent since the fall, worth a moment to share some details of what we're seeing within our customer demand. Given record low consumer sentiment, it's not overly surprising that we continue to see some softness in the under 6,000 transaction tier. At the other end of the spectrum are premium value enhancers like LoveSoft storage and reclining seat have been able to offset that softness. And we've experienced mid double digit growth in our over $6,000 transactions. With the balance of the year, our efforts will be concentrated on leaning into this high dollar value transaction growth, while improving accessibility and competitiveness in the opening price point options. We'll have more to share on this in coming quarters.

Let's now focus on our brand and performance marketing engine. Sean referenced the modernization of our playbook, which is not simply rooted in spending differently, but in operating differently as we build towards winning an AI-driven modern discovery. Quarter one demonstrated our ability to improve media efficiency and optimize advertising and marketing investment. And we are seeing signs that the strategy is working. We're strengthening the brand to both drive sales now and build equity over the long term. Our Here for Life creative evolution is live in market, improving both emotional connection and cultural relevance while bringing new and repeat customers into the funnel and converting them. While other furniture brands seek to sell perfection, Lovesac is going to show perfect reality.

Real homes, real people, real emotion. Because real life is what we are here for. Here for Life is a full 360-degree campaign with paid, owned, site, store, and retail running from now through July. We continue to be at the epicenter of the cultural zeitgeist by tapping into important demand moments with strong campaign messaging and creative. Our Ditch the Situation ship campaign activated around the February holiday window, spanning both Valentine's Day and President's Day, and was based on a simple insight. many people are settling in life, particularly on their couch. We tapped into the broader cultural conversation around upgrading what no longer serves you and translated it into a compelling home category message. And the results were strong. 1.2 billion earned impressions and paid search up 33%.

And it's a great example of the marketing engine we're building, one that strengthens the brand while delivering against our sales targets. We drove meaningful efficiency gains while scaling demand for the quarter. We estimate our revenues attributed directly to media grew 13% and we drove double digit return on ad spend improvements through continued repositioning of our marketing model. That repositioning is a continuation of our migration from linear heavy media to a fully integrated digital first ecosystem powered by social search, influencer and creator content. This is not just a channel mix shift, rather it is a structural shift to an integrated acquisition system that enables continuous optimization, better targeting, and compounding returns over time. I also want to add that while advertising spend for the quarter was down, it was driven by planned timing of activations, and we're optimistic that the efficiency gains in quarter to one will scale as we invest close to our historic levels across the balance of the year. Finally, we're building a competitive advantage in modern discovery.

In quarter one, we invested in AI readable content, structured data, and creator ecosystems to drive agentic engine optimization. This is just the beginning with much more to come. Second is our digital configurations and how we bring LoveSac to life online. Our digital transformation continues to bear fruit as we create a more intuitive customer experience and optimize discoverability. And quarter one demonstrated continued improvement. E-commerce sales for the quarter increased 7.1% year over year. supported by growth in traffic and higher average order values, enabling us to increase our econ penetration by 170 basis points versus last year. As Sean mentioned, Snug continues to illustrate that a digital-first platform with simplified value proposition and streamlined assortment can win on lovesac.com in parallel to our more complex platforms that skew towards showroom demonstrations.

Most importantly, we continue to see record levels of web customer satisfaction. reinforcing our confidence that our investments are enhancing the customer experience and unlocking demand. Third is our showroom network, and it continues to serve as a high-impact brand asset that amplify our Design for Life platforms and anchor our omnichannel advantage. As we scale to 281 locations by the end of quarter one, this fleet continues to deliver compelling returns with one-year net cash. cash paybacks, and limited cannibalization across markets. Showroom net sales increased 0.5% during the quarter, despite increasing traffic pressure across the broader category. Importantly, while traffic was pressured, conversion increased year over year, and our quote pipeline increased approximately 12%. As I've shared before, we enhanced our performance-based compensation program for the field teams starting back in quarter four, and we see this enabling our growth. And then finally, our partnership model extends our customer acquisition engine beyond our own channels and demonstrates the scalability and efficiency of our model to the next generation. without ceding control of the customer relationship.

While quarter one performance was impacted by lower Costco pop-up shop counts and some promotional timing, we're well underway optimizing this engine. Recent tests focus on show segmentation and cadencing, staffing model improvements, and assortment expansion, delivering all encouraging operational trends and margin improvement that gives us the confidence to roll these strategies out further. And of course, these customer acquisition engines are merely a means to an end to build long-term customer relationships. We're laser focused on elevating the experience to match the strengths of our platforms, particularly in fulfillment and the services we provide. of choice and now white glove delivery and assembly pilots continue to perform well and on track for national expansion this year loved by lovesac our resale platform has built momentum and continues to deliver in line with our expectation and reinforces our circular operations model loved which is now live in 30 states, has seen seven in 10 customers are new to the Lovesac brand, further validating resale as an important entry point to the Lovesac ecosystem. Furthermore, we expanded the program with incremental products during quarter one, including the reclining seat and snug. LIVETING THEN TO OUR KEY GROWTH ENABLERS, OUR ADVANTAGE SUPPLY CHAIN DELIVERED SOLID OPERATIONAL PERFORMANCE IN QUARTER ONE WITH CONSISTENT PROGRESS IN PROCESSING, IN TRANSIT TIMES, AND ON-TIME DELIVERY METRICS. OUR ONGOING NETWORK EFFICIENCY GAINS HELP DELIVER BETTER CUSTOMER EXPERIENCE CONSISTENCY AND LOWER COST TO SERVE, which helped offset some of the external cost pressure we saw in the quarter, owing to geopolitical uncertainty in oil and freight inputs.

Keith will discuss this in greater detail, but let me take a moment to discuss how we're navigating both this increased cost environment as well as the ever-evolving tariff landscape. First, with respect to increased oil prices and the impact on our freight costs, our beneficial cargo partnership includes securing capacity at a contractual rate for that capacity. As such, this provides us with meaningful insulation through times like these where spot market prices spike. In quarter one, we benefited from strong partnerships that help mitigate the volatility of the spot market, and we will leverage these partnerships year to go. As for domestic shipping, including last mile, we have We plan for rates based on the trailing 30-day oil prices. And then second on tariffs, our assumptions haven't changed, and we're actively mitigating risks through our sourcing diversification, operational discipline, and fuel for growth cost savings program. Regarding refunds IEPA tariffs, we applied for IEPA tariff refunds and quarter to date we've received $3.4 million.

The amount already received is the only amount that has been contemplated in our guidance due to uncertainty of timing and potential recovery of the remaining balance. Lastly, as Sean shared, We are on track with our onshoring initiative for factional seats launching later this year with the design enhancements of improved comfort, functionality and ease of assembly, all of which are real value to our customers. In sum, our supply chain is becoming more efficient, more resilient and better positioned to support our next phase of growth.

And with that, I'll turn the call over to Keith. Keith Hughes, Chief Financial Officer, The Financial Aid Program, Thanks, Mary. Let's jump right on into a quick review of first quarter, followed by our outlook for the rest of Fiscal 27. As we begin with performance metrics, please note that all references to the first quarter refer to Fiscal 2027, unless otherwise noted. IN THE FIRST QUARTER COMPARED TO THE PRIOR YEAR PERIOD. SHOWROOM NET SALES INCREASED 0.6 MILLION OR 0.6%, TO 97.1 MILLION IN THE FIRST QUARTER COMPARED TO THE PRIOR YEAR PERIOD DRIVEN BY THE NET ADDITION OF 14 NEW SHOWROOMS. INTERNET SALES INCREASED 2.4 MILLION OR 7.1%, TO 35.7 MILLION IN THE FIRST QUARTER COMPARED TO THE PRIOR YEAR compared to the prior year period.

These were partially offset by a decrease of 1.0% in omnichannel comparable net sales. sales which include popup shop sales, shop in shop sales, open box inventory transactions in the Love by love sack program decrease 3.1 million or 36.3%. The 5.5 million in the first quarter compared to the prior year period. The decrease was primarily attributable to the closure of the the company's Best Buy Shop and Shop locations as a result of the discontinuation of its partnership with Best Buy. BY PRODUCT CATEGORY IN THE FIRST QUARTER OUR SACTIONAL NET SALES DECREASED 1.4%. net sales decreased 22.5% and our other net sales which includes our new snug platform decorative pillows blankets and accessories increased 228.1% over the prior year GROSS MARGIN DECREASED 160 BASIS POINTS TO 52.1% OF NET SALES IN THE FIRST QUARTER OF FISCAL 27 VERSUS 53.7% IN THE PRIOR YEAR PERIOD. PRIMARILY DRIVEN BY INCREASES OF 380 BASIS POINTS IN INBOUND TRANSPORTATION AND TARIFF COSTS AND 110 BASIS POINTS IN OUTBOUND ON TRANSPORTATION AND WAREHOUSING COSTS. PARTIALLY OFFSET BY AN INCREASE OF 330 BASIS POINTS IN PRODUCT MARGIN DRIVEN BY PRICE INCREASES AND COST REDUCTION INITIATIVES, offset by higher promotional discounting. SG&A expenses a percent of net sales with 49.6% in the first quarter of fiscal 27 versus 48.5 in the prior year period.

Increased percentage is primarily related to higher payroll and other overhead costs. The increase in selling general and administrative expense dollars was primarily related to increases of 1.0 million in payroll associated with higher incentive compensation and 0.5 million in other overhead costs. Rent increased by 0.3 million related to 0.4 million increase in rent expense from our net addition of 14 showrooms, partially offset by a $0.1 million reduction in percentage rent. Advertising and marketing expenses decreased 2.0 million or 10.7% to 16.6 million for the first quarter compared to the prior year period. Advertising and marketing expenses were 12.0% of net sales in the first quarter as compared to 13.4% of net sales in the prior year period. Operating loss for the quarter was 17.4 million compared to 15.0 million in the first quarter of last year, driven by the factors we just discussed. Before we turn our attention to net loss, 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 complicated features.

STAFF ARE RESPONSIBLE FOR ARE RESPONSIBLE FOR THIS END OF TEXAS RESPONSIBLE FOR THIS END OF TEXAS RESPONSIBLE FOR THIS END OF TEXAS JOINT AS I MENTIONED THE MAN SCHEDULED HUSH HER HER RATHER I'LL NOT USE THE RATHER I'LL NOT USE THE RATHER I'LL NOT USE THE END OF TODAY. During the first quarter, we recorded an income tax benefit of $5.6 million as compared to $3.8 million in the prior year period. increase in our effective tax rate was primarily driven by the impact of permanent differences associated with employee benefit and equity programs. Adjusted EBITDA loss for the quarter was $10.5 million as compared to $8.4 million in the prior year period. Turning to our balance sheet, we ended the first quarter with a healthy balance sheet that provides substantial flexibility for Lovesac to invest in growth to enhance long-term value creation for shareholders. We reported $57.0 million in cash and cash equivalents while retaining $35 million in committed availability and no borrowings on our revenue. recently amended credit facility. We feel good about both the quality and quantity of our inventory and our ability to maintain industry-leading in stock positions and delivery times. We anticipate modest increases in inventory balance during fiscal 27 versus the prior year to account for product and platform expansion.

Second, our strategy is to allocate excess capital opportunistically with a focus on long-term value creation and enhancing returns on capital. To that end, in the first quarter, we repurchased $2.4 million of our common stock outstanding, leaving substantial dried powder available as reflected by approximately $50. $51.7 million remaining under our existing share repurchase authorization. Please refer to our earnings press release for other details on our first quarter financial performance. Now our outlook. I'm sure I sound a little like a broken record, but it's honestly the case that we've seen relatively consistent low single-digit category declines continuing. Some weeks improve, while others fall short, which seems the reality we're in from a macroeconomic perspective. We're planning for this to remain the case throughout the remainder of the year. the year. While we strive for more, we were pleased to have demand up a couple of percent in the fiscal first quarter and to hold revenues at flattish, both better than the category.

Recall, as we discussed last quarter, revenues for first quarter were slightly behind demand owing to the expansion of our white glove delivery option near the end of last year. the end of the quarter. We've seen these orders being scheduled slightly further out than our normal one to two weeks for traditional fast and free delivery, creating a temporary gap. We anticipate this dynamic may continue into the fiscal second quarter as we expand the offerings even more broadly. But we see this as a long-term positive since the customer feedback has been extremely positive, and it opens up sales that wouldn't have occurred had we not had the service. There are a few other items to note regarding what's included in our fiscal second quarter and full year guidance. First, we've adjusted our plans to reflect our latest outlook for costs related to COGS and logistics as a result of inflation in materials, energy, and transportation. Second, we factored the latest backdrop for tariffs for the remainder of the year and aren't speculating as to incremental changes that might arise.

Third, as it pertains to tariff refunds, we are including solely those that we've already received and are not including potential future recoveries. Please note that this means the fiscal second quarter and full year include approximately $3.6 million of refunds collected, which benefits gross margins and includes includes a small amount of interest in our interest and other income line item. Specifically for the full year, we estimate net sales of $700 to $740 million. WE EXPECT JUST THE EBITDA BETWEEN 35 AND 46 MILLION. THIS INCLUDES GROSS MARGINS OF 56 TO 57%, ADVERTISING AND MARKETING OF APPROXIMATELY 12% 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 5 and $12 million. We estimate diluted income per common share in the range of 34 cents to 81 cents and approximately 14.8 million estimated diluted weighted average shares outstanding.

We estimate a full year effective tax rate of 39.1%. to 40% at the midpoint of the range, though this can vary widely depending on where pre-tax income ultimately ends up across the range within our outlook. For the second quarter, we estimate net sales of 157 to 166 million, representing modest revenue growth at the midpoint. We expect adjusted EBITDA between negative 4 million and positive 2 million. This includes gross margins of 57.5 to 58.5 percent, advertising and marketing of approximately 14.5% as a percent of net sales, and SG&A of 44.5 to 46.5 as a percent of net sales. We estimate net loss to be 3 million to 7 million. We estimate basic loss per common share to be 20 cents to 48 with 14.7 million basic weighted average shares outstanding. In summary, we're balancing prudence and efficiency with our belief 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, and new categories. to support a powerful multi-year secular growth outlook with macro upside exposure as icing on the cake. With that, over to you, operator.

Thank you. We'll now be conducting a question and answer session. We ask that you please limit yourself to one question and one follow-up. If you'd like to ask a question, please press star 1 on your telephone keypad and a confirmation tone will indicate your line is in the question queue. press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Thank you. And our first question is from the line of Thomas Forte with Maxim Group. Pleased to see with your questions.

Great, thanks. So, Sean, Mary, and Keith, thanks for taking my questions. I have one question, one follow-up. So, Sean, high level, Mary used the words AI, so I'm going to blame Mary for giving me the opportunity to ask this question. Can you think about agentic commerce in the category.

and what Lovesac is doing to capitalize on that opportunity? Thank you, Tom. I appreciate the question. Yes, I mean, I think obviously, Thomas, we have seen a couple of things, a lot more of search that customers are considering as they really think about a very significant purchase is coming through LLMs. So, the teams have have been really working to ensure all of our content is readable. You know, with LLMs, there's often a lot more words that help kind of describe what people are looking for versus traditional Google search. So the team have been doing a lot of work around AI readability and kind of getting all of that structured in place. I think the second piece is then we think about working and piloting, for example, a chat GPT in terms of ads and the ability to be able to click through from that search to take us straight through to our site. And then as I had shared, because everything is fully connected, we've done a lot of work about how do we actually improve our site experience.

So the searchability becomes a lot less friction. and enables them to be able to drive conversion a lot faster. So a lot of progress the team have been doing on the site. I think that's a lot of why the performance in Q1 was so strong. And we're seeing an uptick in terms of our share of voice on LLM. So more to come. It's just really kind of started, Tom, but we.

see a lot of opportunity here. Thank you, Mary. That was a great answer that I appreciate very much. All right, so here I'm a little confused. So when I think about Love by Lovesac, and I think about the performance in the quarter where you had the strength in assortments priced at 6,000 and higher, and I think about the potential for your re-commerce effort with Love by LoveSec to give you counter-cyclicality. So how are consumers, using Love by Lovesack? Are they using it as a way to engage with the brand and save money? Are they, help me understand how Love by Lovesack, you did a great job of explaining the more than 6K and the less than 6K, but I'm confused on the Love by Lovesack part.

Yes, I know, it's a great question, Tom, and obviously you know, having studied us for so long, Love by Love SAC really just started rolling out this year. So we're in 30 states. We really haven't switched on marketing to tell people a lot more about it because we've been really still working through making sure the processes from searchability on Love by Love SAC through to the transaction and shipping out and so forth, you know, that you can really have a lot more volume. So I think that's partly on us that we want to make sure we can sustain a great experience and then build it out. And I think as people learn more and more about it, then to your point, there's an opportunity. And as I indicated earlier, we see a lot of opportunity. There's a lot of work that teams are doing about how to tap into that lower size transaction. So you're spot on that's an opportunity.

So expect to see more from us.

that builds out. Thank you, Mary. Thank you, Tom.

Our next questions are from the line of Brian Nackel with Oppenheimer. Please receive your questions.

Good morning. Thanks for taking my questions. So the first question I want to ask is about the been more near term, but you have a lot of moving pieces here with sales. And we talked a lot about the choppy macro backdrop. But if you look at the Q1 results, is it fair to assume that the business was slower? There was a slowing from what we saw, let's just say the second half of last fiscal year.

Hey, Brian. Yes, Keith, you take it. Yes. If you just want to jump in. It's a little bit of a difficult question to answer. I think, you know, a number of factors are at play. And I think that's a good point. I think to start with what those movie pieces are, you know, the macro uncertainty within sort of that, like, let's call it the upper middle class that we've talked about was definitely clear to us. And, you know, and when we talk about seeing strength above 6,000, I mean, it gets even stronger when you get above 8,000, get above 10,000. thousand and I you know I think what we're seeing there is the very high end is doing very well right I think that what we started to do during this quarter was to introduce new strategies to increase attractiveness of opening price points to try to rekindle some of that transaction growth below six thousand you saw us running some promotions around our rain chenille fabric, which is a fantastic fabric.

We liked what we saw from that. You're going to see more expansions of that coming, not only in 2Q, but as we get into 3Q. And I think what you're seeing is hopefully going to be improvement in that trend as well. So Mary mentioned that in her comments. You're going to see a lot more coming on that is we try to really bifurcate our marketing and promotional approaches to maintain strength at the high end where the demand is strong, but increase the opening price point. Yes. attractiveness. We did have some shifts in timing in relation to our spend as we're experimenting with a few new of these initiatives, as Mary talked about. So we did have a lighter spend in Q1 than the run rate.

That spend should step back to more normal rates for the full year. That's part of this as well. And we're about to have a whole bunch of new product news. So, you know, nothing surprising. And even to go back to like where we gave guidance for the quarter, we came in at the high end of the range from what we had originally provided. So, you know, I think generally speaking, giving all of the moving pieces, because you're right, there are a lot of moving pieces. I think the quarter ended up. you know, in a good spot for us. And that sets us up for, you know, hopefully momentum in the second half.

And Brian, maybe if I can just add one other point to what Keith shared. So, you know, Keith had talked earlier, you know, our demand outpaced net sales because because we are building out our paid services. So if you actually look at the demand growth relative to the revenue growth in Q4, it's pretty much in line. But obviously with a bit of a lag as customers are selecting their delivery and installation dates, then you are seeing that bit of a difference in the delta of demand and revenue.

that's helpful I appreciate all that then the second question I want to ask is on tariff refunds so you know and we're starting to hear, I guess, more of this throughout the consumer sector broadly. But so you've started to receive these refunds. So I guess the questions I wanna ask is, know, is there any insight into how much more you could receive and the timing of that? And then probably more importantly, you know, how should we think about the.

ways in which Lovesec plans to utilize his refunds. All right, I'll start and then I'll kick it over to Mary. So to give you some context, we applied for and were accepted for 20, meaning our refund application was accepted for $20.8 million of total refunds. We received the original 3.4 at the very beginning of the opening of the window, and it's been and pause ever since. That's why we're taking this approach. So as it relates to timing for the remainder, we don't know. You know, I think that's why we've taken the approach we have and consider it.

You know, we'll include it and report on it as it's received. You know, so fingers crossed that this comes. We would love to have that back. I think, Mary, if you want to talk about some of what our plans are for that, I'll kick it over to you.

Yes, sure, thank you. So I think, you know, obviously, Brian, we will always plan on what we have in our bank account because there's still a lot of uncertainty around, as Keith said, timing, but also actually receiving the rest of the refunds. The team are actively in the customs portal. So, you know, your guess is as good as ours in terms of when it will come in, but some indications that it could be, you know, in the next, you know, month or so. And then I think in terms of how we would think through in terms of that benefit should everything come through, You know, we've worked through a number of scenarios to really think in terms of what we would do with that benefit. some could support profitability, some could be around strategic priorities, and we'll also learn a lot more in in terms of how we would treat this given if there's other considerations. So we don't want to count on it yet, but obviously the team has done an amazing job getting in for those applications and receiving them. So we'll share more with you as we get those realized.

Very helpful. Thank you. The next questions are from the line of Maria Ripps with Canon Corps Genuity. Please receive your questions.

Great, good morning and thanks for taking my questions. Maybe just to follow up on the last question, can you maybe just talk a little bit about any changes in consumer behavior sort of this last quarter? I know you talked about demand below that 6,000 level, but anything incremental you would highlight in terms of maybe configuration mix, financing attached, response to promotions. I guess more broadly, has the consumer you're seeing in May and June gotten any better or worse versus what you saw in February?.

MARIA, THANK YOU FOR THE QUESTION. VERY MUCH SIMILAR TO WHAT WE HAVE SEEN AND WHAT WE'VE BEEN SHARING. SO CONTINUED ACCELERATION ON THE LARGER SIZED TRANSACTIONS, and a lot of strong performance there, as well as also the value added additions such as Recliner, Love Soft and StorySeat, just to name a few. So very much that trend is continuing and still seeing that softness in the smaller size transactions. So really nothing new for that. I think I think as we've always shared, customers are more focused on timing. So as we start an event, it can be a little bit quieter in terms of their conversion.

And then as the event gets to a close, then you get a lot of activity. So you're just seeing definitely that bell curve moving out. I think Keith, we look at obviously at things like financing, we're really not seeing an uptick on uses of financing. So really not driving there. So I think our job to do, as we shared, is continue to accelerate on what's working as as we see our consumers responding, and then also doing some more work as key shared on that smaller size transaction.

So that's really kind of, Maria, what we are seeing up until now. Got it. That's very helpful, Mary. And then can you maybe give us a little bit more color on the domestic production that's starting this summer? I guess, how much of your production cost base does that initially cover? What's sort of the realistic timeline to scale that volume? And then how should we think about sort of the cost differential versus impact? importing sort of in the rollout phase, but also at scale. Yes, thanks, Maria. This is Sean.

responding I we're very excited about on shoring you know I think all of of us are living on the same planet and observe all of the volatility that, you know, this endeavor and hopefully help us mitigate on top of, of course, the sustainability considerations on top of cost considerations, which at the outset, you know, we're, we're, our, our goal is to come in flat, right? manufacturing, I'll call it like for like, but I'll come back to that. It's not like for like. Manufacturing like for like in the United States, versus say Vietnam, Asia, is a very difficult proposition. And in fact, it was not achievable on a true like-for-like basis, meaning we're not just making the same product out of wood here in the United States. We've taken a whole new design approach to the product, designing it for manufacturing, designing it for automation. And yes, we're on track to begin that process. you know, the early stages of that manufacturing late this summer. And so we're very excited about that. It's going to take like any massive undertaking.

It's going to take a period of time to come to scale. And so we are not planning any material pickup. in margin or even offsets to the supply chain in this fiscal year. And even though we might see, we will see product rolling through and selling through in the second half of the year. it's still got a long way to scale. We believe that we'll have the capacity and the opportunity in the future to make the consideration of, for instance, eliminating our overseas manufacturing for those SKUs. And again, I'll remind us that we're talking about in the earlier stages of this, factional seats. But we're leaving our options open. In a volatile world, optionality is key.

Redundancy is key. And it's served us well as we've seen manufacturing ebb and flow between the various countries that we operate in, in Southeast Asia and in Asia more broadly. You know, no specifics other than those basic, outline those basic outline factors as we move into this endeavor. We're really excited about it. And, you know, and I think as we look, we've spun up a lot of new manufacturing operations as we've hopped from country to country. through all of this volatility. And what we've seen is that there's always opportunity to do better with time as we observe the manufacturing process, work with our partners to trim costs, revise the product, revise supply chains, and find ways of making it more efficient. We expect the same here. In fact, in this operation, we're more integrally involved, obviously, than our typical arrangement with partners overseas. But we will not own the factory. We will not operate the factory.

We're not interested in doing that fundamentally as a business. And look, we view so much of this as upside to the business and frankly, another moat around lovesack. Lastly, I'll just remind us that we're also talking about not just a product that's been redesigned for manufacturing. but what I'd call a better product. It's going to have features and benefits that the current sational seats do not offer. they're very cool they're very meaningful uh there will be new patents and and intellectual property protections associated with that and uh we're just super excited about it.

Our next question is from the line of Eric Delury with Craig Hellam. Please receive the question.

Great. Thanks for taking my questions and congrats on the continued progress with challenging macro backdrop here. First for me, just a clarifying question around the difference in the behavior that you're seeing in transactions below and above 6,000. So there's basically a natural mix shift going on right now as transactions above 6,000 are growing very robustly. I think you said mid-double digit. Is your approach here to deliberately accelerate or deliberately slow that mix change? Or you kind of mix agnostic here and you're of course just trying to grow both buckets, just looking to kind of clarify your approach to this bifurcation that you're seeing?.

I mean, I think, Eric, you know us, we're very competitive and we want to win. So we will be very deliberate in accelerating all opportunities. And we see, you know, customers really responding. So 100% continue to drive that and accelerate it. But as Keith said earlier, you know, there's a huge opportunity for us as we think through in terms of recapturing some of those customers at the under 6,000 transaction. We see it in quote growth, you know, that they're there, but they're just taking longer to be able to convert. So there's more initiatives that are coming this year that will share more on the next earnings call that would enable us really to tap into that.

So you can expect us to try and drive both. Awesome, that's helpful. And then just in terms of the marketing engine improvements, I mean, it seems like this is is really starting to starting to flow through the PNL in the past couple quarters um and could you maybe give us just a couple more examples of like, you know, what you've done, um, already whether this is more of like a top of funnel traffic generation focused or more conversion focused. What maybe has yet to make a material impact so far? And how, if at all, does this tie into your sort of bifurcated approach with.

these transactions you're seeing? Thank you. Yes, great question. Thank you, Eric. So, I think, as we've shared, the continued pivot for us was around moving to this paid-earned-owned operating model, really driving out the stronger union economics that you referenced. First, that's around optimizing media mix and moving out of much more of the traditional linear digital social first investments. Teams have done a great job around building a lot more creator content that helps build the equity in the brand. So I mentioned earlier the Here for Life campaign that really helps build brand equity at the top of the funnel and we're seeing a lot of strength there. We're seeing an uptick in brand health, search dynamics are doing really well.

But then as we kind of optimize through and down through the funnel, just really being able to be a lot more focused, whether it be thinking about digital video and social that helps us drive that conversion through the funnel. So things like YouTube have been really strong for us. So the teams are doing test and learn. So I think one of the things that's really good with the new structure we put in at the back end of last year is just they're a lot more agile. They're making moves faster. and a lot more tools to be able to help us to do that. So it's fair to say continued investment because our brand awareness, there's still a lot of opportunities, still a lot of customers to attract. So you're going to continue to see us doing that through broader campaigns, but then a lot sharper through the funnel in terms of driving out the conversion including you know to tom's question earlier how do we really make sure agentic commerce you know is a big frontier for us so you know continue to see more of that evolution.

Thank you very much. Thank you, Eric.

Our next question is in the light of Matt Kuranda with Roth Capital. Please proceed with your questions.

Hey guys, thanks. Just given the higher end strength that you mentioned, I wondered if you could maybe just set the table for the larger format product that you expect to introduce later this year. I wanted to hear a little bit, I guess, about updated thinking around timing of the introduction, anything material that you built into the sales guidance for the year, and then how we should be thinking about cannibalization of kind of the larger configuration sectionals.

Great question, Matt. Thanks. Yes, we're very excited about the larger format sectional SOFA that we're introducing in the latter half of this year. to get right to the question. We do have sales planned in this year for this product, but we have purposely planned very little from a, you know, expectation perspective, from an inventory by perspective, we obviously would love to outperform and see this as a healthy, exciting product launch that will more materially affect next year. But there certainly is an expectation built into this year. I think it's important to zoom out and understand our overall perspective on sectional sofas and on competing in general for more market share. Lovesac is evolving very rapidly right now. And over the next 18 months, investors, you know, if we were to fast forward even 12 months from now, and 18 months from now, Lovesac, will look and show up very differently and become, in many respects, much more competitive, both with what I will call incumbents in the home category, you know, those larger firms that offer full catalogs and, you know, you know, While we will be a long way from any kind of full catalog, we do believe that in the realms that we intend to play in, so now we'll start with the living room, we can be more competitive if we show up. with a more fulsome product offering. So this goes beyond even just sectional sofas.

This goes into some very limited accent products and what we'll call compliments that will allow us to complete the room and and compete better through photography, online catalog, and the overall merchandising and consumer experience. But we will be anchored in the living room by sectional sofas, and that includes Snug. Snug is getting a corner piece this year. Very soon, Snug is getting a corner piece. the swivels for the chairs, which I'm actually sitting in right now. And it's, you know, a really exciting product. I think I have more snug chairs and swivels in my home, obviously, on prototype than any other Lovesac product in my life now. And it speaks to this idea that um, loves that consumers can have any one of these three platforms that we're talking about in their life, uh, in the same room, even in different rooms in different places.

And we, we absolutely intend to take more market share of the living room. And by the way, um, other rooms of the home that have living room esque soft seating experiences so that so rather than even view sactionals as the anchor of this business on the go forward talking let's call it the living room business, we really should shift our thinking to sectional sofas. And by the way, in the consumer's mind, that's what Love Sack is famous for. see it reflected back to us every day on social media. Consumers don't speak to, hey, check out my sactionals. They say, you know, check out my love sack. And it's often confusing to me as the father of this brand, A love sack used to be a six foot, eight foot bean bag, but a love sack now in a customer's mind is a really big, amazing, gushy, ushy sofa that does all the things. And by the way, each one of our platforms will do all the things in their own way, including this one that we're introducing the back half of this year that you asked about.

So we're really excited about it. a bigger strategic move and it really kind of sets the table and and solidifies our standing, again, to compete for more market share. As we then move into the new room, which obviously is also a massive focus that is taking a lot of attention, energy and investment space.

inside the company now. Appreciate all the details, Sean. Thanks. And then maybe just... with the new room that's coming and kind of the, the wider assortment that you're referencing. Here's how we should be thinking about showrooms and expansion there. I know that you guys have slowed the expansion a bit. But how should we be thinking about how the assortment fits into the existing showroom footprint that you have? We need to sort of change some of the posture of the showrooms to make room for the new products, new room that you'll be introducing next year. I wanted to hear a little thoughts on that.

sort of the showroom strategy? Yes, this is a great question. One that I'll be a little bit vague about because we're not quite ready to reveal all of our plans there, but I'll try to give you some breadcrumbs. Love Sack is one of the world's foremost operators of small footprint specialty retail products. transacting on very large ticket, high margin products. fueled through advertising, fueled by advertising. We don't want to mess that up, right? we recognize the power in that as you as you anyone can see store still represent almost 70% of our sales and And we love that because these are customers that we have a deeper relationship with. We know them. We hear their stories. We plan with them. And then we continue to follow up and clientele with their friends. Yes. there isn't a better outcome than having face-to-face real world transactions and relationships, especially in this day and age.

That's becoming more and more true as society continues to evolve and become more digital. So we are absolutely sure showroom friendly and excited to be in that business. At the same time, our original mantra continues to be true. We want as few as we can get away with, right? Like we are a business, we intend to be a high margin business. Obviously we're investing very heavily in all this innovation that we've spoken of, which is compressing our overall margins right now, and to some degree that will be be the case for a while because we have a lot of innovation to unleash but stores and and the rent for these, uh, and, and we, we, we now, you know, call them stores, call them showrooms. represent our largest expense, you know, the rent expense. And so, um, what I'm saying to you is we move into a broader assortment. No, we don't intend to grow the size of our footprint very much already though.

The leases we've been signing is we've gotten a sharper real estate strategy and, frankly, more power in the marketplace because Lovesac shows up with very high sales per square foot, etc. We've been signing slightly larger leases for a long time now and found that to be very successful, still putting up the same and better metrics from a sales per square foot and overall performance standpoint. So we'll continue to allow that square footage to creep just a little bit, but they're still, you know, in that 1,000, 1,200, a big love sex tour might be 1,500 square foot range. As we look toward the new room, again, I'll keep it vague other than to say we recognize the power in focusing a small footprint on selling anchor items. So the anchor for our living room. FORMAT IS THE SECTIONAL SOFA. AND WE DON'T WANT TO DELUTE I'll also say, though, that we want to lean into that strength, amplify that strength, and be able to... take advantage of now new opportunities to have these brand billboards in the best geographies and real estate in the United States of America. It's another piece of this overall marketing engine that we've built.

So lastly, I'll just say that we do also like the idea of every one of these wonderful associates that we have. We have almost 2,000 Sackers around the country representing the brand. We love empowering them to sell against a whole catalog and use our website as that full – digital configuration experience. So even as we talk about some of these complementary products that may or may not appear in their stores, as we talk about new room products that may or may not appear in their stores, their ability to sell against a full catalog of product that's broadening and create these wonderful interactions with customers. You've seen how we can miniaturize our products through the blocks that have been copied by others at this point because they're so effective. But our ability to sell very large ticket, high margin items out of small spaces is a superpower of ours. And we intend to lean into that as you watch all this innovation unfold of next year.

So we have a North Star of keeping, let's just call it rent low, expenses low, and sales higher and higher. And that's what drives our decision making in that realm.

Just to throw a CFO-style bullet on the end, just for fun. In the simplest form, Matt, the way I think about this is, as opposed to here's our store, how many stores can we have? It's what market share do we think the Love Sack brand can take across all of these products and platforms, and then what's the most efficient way to get it? We're going to test a few things, learn from that, what gives the greatest customer experience, and then let the data tell us. us what the next steps are. So just a slightly different summary on exactly what Sean just said.

Thanks, guys. I appreciate all the detail. Thank you.

Ladies and gentlemen, this concludes our question and answer session. I'll turn the floor back to management for closing comments. Thank you.

Thanks so much to all of the Lovesac family out there that supports this branding company and our Lovesac investors that continue to give us. the support we need to unfold this awesome vision and ultimately inspire humankind to buy better stuff, saying buy less stuff. Have a great day.

great day. This concludes today's conference. We disconnect your lines at this time. We thank you for your participation and have a wonderful day.

[Call has ended.]

Greetings. Welcome to Lovesac's Fourth Quarter Fiscal 2026 Earnings Conference 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 today by sharing a high-level overview of our fourth quarter and full year fiscal 2026 results, provide an update on our Design for Life product platforms and strategic priorities for the year ahead 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 detail on our fiscal 2027 outlook.

Before getting into the details, I wanted to capture the bigger picture strategic accomplishments from fiscal 2026 that could be easily overlooked. These accomplishments support our evolution from a product-driven company into a multi-platform, multi-room lifestyle brand, a brand that we believe can be the most loved home brand in America in short order and in one day, the most loved brand in America full stop. That's our ambition. We build our strategies to that end. These accomplishments recognize the economic landscape and competitive realities of a time such as tariffs, with some reorganization of priorities to better optimize the opportunity to create value for stakeholders over the long term.

First, we reinforced our already strong position in the living room with a focus on harvesting the strong brand equity we have, earned over our now 27 years of history. We launched a new seating platform called Snugg that will expand further in the coming months into a full sectional entry-level platform with new accessories, including the Swivel Arm Chair that we previewed at ICR. We reengineered our Sactionals platform and accelerated plans to onshore the manufacturing of the most core pieces beginning this summer. Mary will share more about this exciting initiative later. And we developed and consumer tested a new high-end Sactionals Sofa platform that we plan to bring to market later this year, that will help round out Lovesac's offerings in the living room and provide more options for more customer preferences in style and in function, all done in a uniquely Lovesac way.

Second, we set the stage for a planned calendar 2027 launch of a full suite of Design for Life products for an entirely new room in the home. Yup that's right, a full suite of products and with a category-defining launch that we intend to support with a significant splash in the first half of next year.

Third, we strengthened our leadership teams, particularly in marketing, e-commerce and technology and soft launched Essential Services, including enhanced delivery options that our customers have pledged for. We are in early innings for these growth enablers but are already seeing the benefits as evidenced in our fourth quarter results, such as double-digit growth in our Internet channel. That's a perfect segue. So let's run through the specifics on fourth quarter and the full fiscal year 2026.

Uncertainty in economic conditions, intensity and promotions and ever-changing tariffs tested our consumers and challenged our teams in fiscal 2026. But we adapted successfully, achieving market share gains, driving positive omnichannel comparable sales growth, full year profitability, positive free cash flow and a record year-end cash balance with no debt. Fourth quarter net sales grew nearly 3% with positive omnichannel comparable net sales and new showroom contributions outpacing the category, which declined 3.3%. Very encouragingly, Internet sales grew 12.3% in the fourth quarter, showing how much upside there is from the upgrades new leadership has been implementing over the last 6 months. Tariff and category promotional pressures on gross margins were in line with our most recent expectations as was net income, which was down slightly year-over-year as a result.

For the full year, net sales grew 2.4% with positive omnichannel comparable net sales and new showroom contributions outpacing the category, which declined 3.4%. Leverage of SG&A and marketing as well as extraordinary efforts from our teams to mitigate tariff costs had a meaningful beneficial impact on operating profits. But in aggregate, the gross margin pressures from tariffs and category promotions led to lower net income year-over-year.

Finally, our balance sheet remains strong with a record net cash balance as of the end of the year and inventory levels down closer to optimal levels as we've committed to all year long. As a result, we've entered fiscal 2027 in a position of strength with substantial flexibility to enhance growth or optimize returns on capital. I'd like to spend a few more minutes summarizing the substantial developments of fiscal 2026 regarding our brand evolution analysis, the clarity that provided on go-forward product hierarchies and the acceleration of our Made in America initiative.

First, the goal was always clear. Lovesac would transition from being a product-focused company to developing as a true lifestyle brand. And to do so, we needed to sharpen and focus our positioning through a brand evolution refresh. That work, which we completed mid-fiscal 2026, laid a clear and reliable foundation whereon we could build Lovesac into a multifaceted home brand with an organized and prioritized product hierarchy and merchandising strategy. It clarified what would allow us to confidently extend the brand further, but also deeper into the categories where we already have strength in order to compete even more vigorously for market share. It also led us to rethink everything from product naming to some new products themselves and the channels through which some of these new and even existing products can and should be offered.

Next, we took the framework from the brand work and refined our strategic product priorities. The fastest and most effective path to profitable growth was to balance the current with the new, harvesting the brand we have built, shoring up our place as a leader in sectional sofas and in the living room and aiming to take even more share in those places. All this would reinforce our brand equity and put Lovesac in an even better position to compete in the new rooms, the more radical growth initiatives coming. It's essential to understand what this means. We are not looking to add a large number of SKUs. We plan to intentionally launch products and platforms as few as we can get away with to achieve dynamism, high ROI and love for this brand. Additionally, these carefully curated products have been intentionally designed to create daylight between each platform, so they are distinct to customers and accretive to the brand. This is exactly the case with Snugg, Sactionals and the new high-end Sactional Sofa of a different style coming out later this year. This will also be the case with the new room at launch from day 1 built on this multi-platform knowledge that we now have.

Simultaneously with our brand work, we accelerated our Made in America initiative. While long a goal for Lovesac, it became even more imperative with the tariff developments, which still remain fluid. Lovesac has a differentiated competitive advantage, high volumes of limited SKUs. This specialization in sameness and result in high volumes unlocks radical automation, which for us means better and less expensive domestic manufacturing. This initiative begins with Sactionals Seat Inserts this summer, which we completely redesigned not only to optimize for automation, but we've added brand-new features and benefits verified through layers of consumer research. We gained the opportunity to refresh our portfolio of patent and IP protections to boot. Over time, we will apply the same thinking to more and more of our products. Of course, these new Made in America Sactionals will be reverse compatible and can be used seamlessly with all Sactionals ever sold. Furthermore, we expect Made in America products will help mitigate volatility in cost, risk of disruption for overseas shipping and reduce weeks of stock required to provide the fast shipping that we are known for.

Finally, under our new CMO's leadership, we are building a modern marketing engine. By accelerating our digital transformation and expanding our data and analytical tools, we aim to increase Lovesac brand's consideration, lower customer acquisition costs, increase demand generation and drive repeat business and customer LTV, lifetime value. You saw Phase 1 of this in the fourth quarter with much more to come over the coming quarters. Hopefully, it's clear just how much foundational work was completed during fiscal 2026, which we believe sets us up very well as we enter fiscal 2027. After 4 difficult years of category declines, we really hope this coming year would see category demand return to growth, but we don't strategize and plan based on hope. And you're all aware of the geopolitical and economic uncertainties in our world.

Recent months have seen category declines easing, though still declining. And as such, we are planning based on the assumption that the category will once again decline in this fiscal 2027 by approximately low single digits. Keith will share the specifics later, but we believe we have the necessary ingredients to grow irrespective of the category in the near term while maintaining clarity around long-term thinking and value creation. We are expanding our addressable markets in existing and new rooms by leveraging our core brand equities in quality and comfort by capitalizing on our installed base of super fans to drive LTV through repeat business, and that's all while adding ever more households to our family, through more effective marketing strategies and lower cost of customer acquisition.

Our commitment is not solely to grow the top line regardless of macro, which is true, but for revenue growth to drive enhanced flow-through to the bottom line growth and resulting in higher margins. We expect that Lovesac will also absolutely benefit from an eventual category rebound, and we'll take that icing on the cake whenever it arrives. Lovesac entered fiscal 2027 from a position of strength, highlighted by a clear strategic road map and a world-class team focused on generating profitable growth and tremendous long-term value creation for all stakeholders.

In closing, a sincere thank you to our team, our #Lovesac family for their ongoing dedication, commitment and creativity as we work to become the most loved home brand in America. With that, I'll hand it over to Mary.

Thank you, Sean. Building on Shawn's overview of our Design for Life platforms, I'll now focus on our customer acquisition engines as well as our growth enablers that are fueling our momentum. Before diving into the specifics, I wanted to take a step back to reiterate how we think of the unique intersection of our product platforms and customer acquisition engines. We say platforms instead of products very deliberately. Lovesac competes in an industry in which customers choose a product, some for aesthetics, others for comfort or maybe even just for its dimensions, but then they're largely married to that product for 7 to 10 years.

Our platform model is very different because nothing about a Lovesac purchase forces the customer to stop iterating on what's possible within the platform. 85% of our customers evolve, add on to or complement the Sactionals they initially purchased with further purchases. We know from our research that 7 in 10 customers rearrange their Sactionals and more than 4 in 10 add seats or change fabrics. This is a fundamentally different paradigm, closer to Apple than traditional furniture in that the platform only becomes more valuable over time and as it expands.

As evidenced, nearly half of all Lovesac transactions are from existing customers because they recognize the inherent value and the ability to continue to personalize and evolve their Sactional as life and their needs change. This is the heart of what we call our customer acquisition engine superpower. In essence, it's a compounding blend of brand and performance marketing, omnichannel retail presence and customer relationship investments, which yields efficient awareness, customer conversion and long-term brand loyalty. This model is why we fully recoup our customer acquisition cost on the first purchase, and why our lifetime value, as measured by gross profit is 1.7x the initial purchase by year 5. The longer customers own Lovesac, the more they invest to make it their own. It's also why our retail stores have cash paybacks in 1 year, even as we are now nearly 300 stores strong. This platform model aspect underlying our customer acquisition engine superpower, will only accelerate as we move into new categories and new rooms of the home, which we believe will only drive lifetime value even higher, all of which make us feel incredibly bullish on the future for this brand and its economic potential.

There's perhaps no better illustration of how this comes to life than our reclining seat, which has been an overwhelming success, surpassing even our lofty expectations. One out of every 3 new Sactional setups sold in fiscal '26 included a reclining seat. It clearly activated new customers but also drove strong repeat sales behavior. In fact, repeat customers, those already in the Sactionals platform, made up nearly 40% of the sales. It just shows how meaningful innovation drives a powerful lifetime value customer acquisition cost ratio, strong initial purchase gross profit and ever-expanding lifetime value from our installed base of brand enthusiasts that grows every year.

To dive a bit deeper into our customer acquisition engines, let's start with brand and performance marketing. Building on the strategic evolution we began in quarter 3, quarter 4 marked a clear pivot in the modernization of our marketing playbook that was just not driven by spending differently, but by operating differently as we build towards winning in AI-driven modern discovery. As we discussed back in December's earnings, in quarter 4, we optimized our media mix towards a digital and social-first approach, dramatically transitioning from a historically channel-led model, which included large TV spend. This means more integrated paid owned and earned strategies to improve overall return on ad spend and strengthen the economic model. This approach enabled us to build brand interest and awareness while balancing lower funnel tactics to improve efficacy, particularly during key promotional tentpoles. The result was that Black Friday delivered significant year-over-year growth and Cyber Monday more than doubled, making it the strongest Cyber Monday performance in our history.

We launched our Here for [indiscernible] Holiday campaign, delivering a more emotive social-first creative expression. This was complemented by Spread the Love activations with robust influencer and earned media activity, which made brand engagement very strong in total. Perhaps our most notable brand moment was the introduction of our post-holiday [indiscernible] campaign, which delivered earned attention, cultural relevance and incremental traffic during a traditionally quieter period. Notably, these efforts did more than generate impressions. They were built to connect brand storytelling and our Design for Life product platform in order to generate full omnichannel conversion of impressions to sales. It worked.

While we work to stabilize softness in more value-orientated Sactionals segments, which has transactions below $6,000, we simultaneously saw resilience and growth amongst higher average order value customers, driven by innovations such as the reclining seat, LoveSoft and StealthTech. This reinforced our confidence in the brand and the inherent value of our product platforms. Second is our digital configurations and how we bring Lovesac to life online. Our digital transformations, which started in quarter 3 with leadership changes and better aligned internal teams is showing strong early signs of positive impact on Lovesac's online growth.

In quarter 4, we modernized our foundation to unlock easier customer navigation, a more intuitive customer experience and AI discoverability. This effort was clearly evident in our results as quarter 4 web demand increased double digits year-over-year, driven by higher traffic and improved productivity. Demand outpaced traffic during key promotional periods, demonstrating stronger conversion efficiency. Black Friday delivered significant year-over-year growth and Cyber Monday more than doubled. Additionally, web customer satisfaction reached the highest level on record, even during peak volume, reinforcing that our digital investments are enhancing the experience and supporting scaling demand. Overall, we are well positioned to fuel this momentum and continue our digital transformation efforts with the end goal to further improve site engagement and conversion this coming year.

Core to our customer acquisition engines is the ability to flex up certain platforms in the appropriate channels. In other words, we start out by targeting market share potential, then flex elements of our acquisition engines to take that market share in the most efficient way possible. Our fiscal '26 Snugg launch illustrates this potential and highlights the power within our digital-first platform. Snugg's simplified value proposition and streamlined assortment resonated strongly in the digital channel and more than 50% of its year 1 sales came from the web. Snugg's success on web gives us confidence that digital-first platforms can deliver in parallel to our more complex platforms, which skew towards showroom demonstrations.

Third is our showroom experience, the physical brand amplifiers of our Design for Life products and the secret weapon of our omnichannel model. In fiscal '26, our fleet reached 278 stores, and I am pleased to share that the fiscal '26 cohort is on pace to deliver 1-year cash paybacks with minimal cannibalization. In quarter 4, we sharpened our focus on the Lovesac product experience, new selling framework and further tied associate rewards to performance. Our focused selling framework has helped teams more effectively guide customers through the modularity, customization and longevity of our products. It's improving conversion while supporting higher average order values.

In parallel in quarter 4, we launched an enhanced Field Incentive Program with targets tied 100% to the individual showroom sales performance, only with greater upside in compensation for locations exceeding their sales goal. This program helped drive associate productivity to increase by mid-teens percentage versus last year. And based on the success of this enhancement, we are expanding this program into fiscal '27. And finally, complementing our digital and showroom acquisition engines is our partnership strategy with Costco being the primary example.

Our online and pop-up shop model gives us access to Costco's 80 million-plus members while owning 100% of the customer data and relationship. We expanded our assortment with Costco this year, adding new fabrics, reclining seats, StealthTech and [indiscernible] Accenture, just to name a few. We also refined pop-up shop locations to target key Lovesac demographics and segmentations, leveraging our unique ability to sell large premium products in just 100 square feet. When combined, these 4 elements of our customer acquisition engine create an unmatched customer experience that drives brand love and enables long-term customer relationships.

During fiscal '26, we reinforced this further with customer-facing services. We've always delivered our customer orders fast and free within days. But in fiscal '26, we complemented this with room of choice delivery and pilot tested full white glove delivery and assembly, both for a reasonable fee. All has gone well, and we plan to roll out both nationally in fiscal '27. Fiscal '26 also marked the launch of Love by Lovesac, our resale platform. And at year-end, we had 29 states actively participating. Nearly 70% of our Love by Lovesac customers are new users to our ecosystem, reinforcing that this is a powerful acquisition engine and lifetime value builder. Encouragingly, a meaningful and growing percentage of these customers then come back to us buying more from the resale inventory as well as from new inventory. Furthermore, our data shows that these programs reinforce the customers' appreciation for our commitment to Design for Life and circular operations principles and reinforce the long-term value of their investment.

And quickly on our growth enablers, our supply chain is a competitive advantage, a true strength and a key to us sustaining profitable growth. Through fiscal '26, we transformed our sourcing model and supply chain to mitigate tariff disruption. We're pleased to share that we exited fiscal '26 with 0 production coming from China, which is incredible progress given China represented nearly 50% just a few years ago, but that's only step one. Our diversification efforts ultimately aim to bring production closer to the customer, and as Shawn shared, we are accelerating our Made in America initiative and are on track to begin domestic production of Sactionals Seat Inserts this summer. Beyond the benefits that Shawn shared earlier, I'm very excited to share that based on progress to date, we believe that we can do this with gross margins that are neutral to current levels, excluding tariffs. Our internal teams have really outdone themselves this year, and we thank them for such extraordinary efforts.

Now before I turn over to Keith, I wanted to briefly mention our fifth annual ESG report published in December. You may or may not know this, but our purpose as a company, central to our Design for Life principles and operational model is to inspire humankind to buy better so you can buy less. This updated report expanded on that theme and showed continued progress towards our goals, including our commitment to zero waste and zero emissions by 2040. We're proud to have partnered with our U.S. [indiscernible] manufacturer to scale our first zero landfill and net zero emissions production line. We're proud to be the largest re-purposer of recycled plastic bottles in the home category and so much more. We know that our actions today will shape the world of tomorrow, and we are leading by example. Together, we can create a future that's brighter, greener and more comfortable for generations to come.

And now over to Keith.

Thanks, Mary. Let's jump right into a quick review of the numbers and our outlook. Revenues were $697.1 million for the year, which were up from $680.6 million in the prior year, owing to new showroom openings and an increase in omnichannel comparable net sales. Gross margin was 56.4%, a solid level, especially considering tariff impacts. Net income of $4.1 million was down from fiscal '25 owing to higher tariff, freight and operating costs, but still supported positive free cash flow for the year and a healthy cash balance that I'll speak more about in a couple of minutes.

Moving on to the fourth quarter. Please note that all performance metric references to the fourth quarter refer to fiscal '26 unless otherwise noted. Net sales increased $6.6 million or 2.7% to $248 million in the fourth quarter compared to the prior year, reflecting an increase of 0.6% in omnichannel comparable net sales. Showroom net sales increased $5.3 million or 3.5% to $159.8 million in the fourth quarter compared to the prior year period, driven by the net addition of 21 new showrooms period-over-period. Internet net sales increased $8.7 million or 12.3% to $79.2 million in the fourth quarter compared to the prior year period. Other net sales, which include pop-up shop, shop-in-shop, open-box inventory transactions and The Love by Lovesac Program, decreased $7.5 million or 45.4% to $9.0 million in the fourth quarter compared to the prior year period. The largest contributor to the decrease was the closure of the company's Best Buy shop-in-shop locations as a result of the discontinuation of its partnership with Best Buy.

By product category in the fourth quarter, our Sactionals net sales increased 1%, Sacs net sales decreased 18.2% and our Other net sales, which includes our new Snugg platform, decorative pillows, blankets and accessories, increased 191.9% over the prior year. Gross margin decreased 230 basis points to 58.1% of net sales in the fourth quarter versus 60.4% in the prior year period, primarily driven by increases of 300 basis points in inbound transportation costs and tariffs and 90 basis points in outbound transportation and warehousing costs, partially offset by an increase of 160 basis points in product margin, which is driven by price increases, cost reduction initiatives and concessions from our vendors in response to changes in the tariff environment, partially offset by higher promotional discounting.

SG&A expense as a percent of net sales remained relatively flat at 28.1% in the fourth quarter versus 28.0% in the prior year period. The $2.2 million increase in selling, general and administrative expense dollars was primarily related to increases of $7.9 million in payroll related to higher incentive compensation, $0.8 million in new product innovation costs and $2.0 million in other overhead costs, partially offset by decreases of $4.0 million in professional fees, $3.9 million in equity-based compensation and $0.6 million in credit card fees.

Rent increased by $0.1 million related to a $0.8 million increase in rent expense from the net addition of 21 showrooms, partially offset by $0.7 million reduction in percentage rent. Advertising and marketing expenses decreased $1.3 million or 4.7% to $25.5 million for the fourth quarter compared to the prior year period. Advertising and marketing expenses were 10.3% of net sales in the fourth quarter as compared to 11.1% of net sales in the prior year period. Operating income for the quarter was $44.9 million compared to $47.6 million in the fourth quarter of last year, driven by the factors we just discussed.

Before we turn our attention to net income, net income per diluted 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 income for the quarter was $32.1 million or $2.19 per diluted share compared to $35.3 million or $2.13 per diluted share in the prior year period. During the fourth quarter, we recorded an income tax provision of $13.5 million as compared to $13.0 million in the prior year period. The effective tax rate for the fourth quarter and fiscal year was 29.6% and 39.0%, respectively. The increases versus the prior year were caused by a deferred tax asset shortfall owing to equity compensation previously expensed at higher levels and exacerbated by low pretax income. We do not anticipate these matters to recur and believe a tax rate closer to 30% for the full year is appropriate to use in your models for future years.

Fully diluted weighted average shares outstanding were approximately 14.7 million shares for the full year. We've adjusted our calculation for diluted shares to better align with GAAP's treasury stock method. This change addresses the historical over inclusion of certain RSUs and PSUs in our denominator, which had previously resulted in a higher diluted share count. Adjusted EBITDA for the quarter was $49.6 million as compared to $53.9 million in the prior year period.

Turning to our balance sheet. We ended the fourth quarter with a healthy balance sheet that provides substantial flexibility for Lovesac to invest in growth and enhance long-term value creation for shareholders. We reported $101.9 million in cash and cash equivalents while retaining $36 million in committed availability and no borrowings on our amended credit facility.

First, as we've discussed all year long, we intended to reduce the levels of excess inventory on the balance sheet at fiscal '26 year-end versus the prior year level. We're pleased to share that this was the case, down 14% versus the prior year. We feel good about both the quality and quantity of our inventory and our ability to maintain industry-leading in-stock positions and delivery times. We anticipate modest increases in inventory balance during fiscal '27 to account for product and platform expansion.

Second, I'd like to spend a moment on our excess capital allocation strategy. Given significant uncertainty and macro backdrop owing to tariffs and consumer spending, we did not repurchase any of our common stock during the fourth quarter. For the full year fiscal '26, we repurchased $6.0 million of our common stock outstanding, which left approximately $14.1 million remaining under our previous share repurchase authorization. We're pleased to announce that Lovesac's Board of Directors recently authorized the repurchase of up to $40 million of outstanding common stock, incremental to the previous authorization, bringing the total authorization available to approximately $54.1 million. Our approach toward allocation of capital is unchanged. We intend to be opportunistic, focusing on long-term stakeholder value and enhancing returns on capital. Please refer to our earnings press release for other details on our fourth quarter financial performance.

So now for our outlook. As Shawn mentioned, we're not assuming that macro conditions improve and have, therefore, assumed for our planning purposes that the category continues its recent trend of low single-digit declines throughout the fiscal year. We're also facing uncertainty in many costs as a result of various geopolitical matters. In our outlook, we have factored in our latest understanding and expectation for tariffs as well as some pressure from the recent rise in oil prices on shipping and certain cost of goods sold. On the other hand, we haven't included an assumption for benefit from a potential recovery of previously paid IEEPA tariffs. We're monitoring all of these matters closely, and we'll update you as soon as practicable.

Specifically for the full year, we estimate net sales of $700 million to $750 million. We expect adjusted EBITDA between $33 million and $44 million. This includes gross margins of 56% to 57%, advertising and marketing of approximately 12% 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 $5 million and $14 million. We estimate diluted income per common share in the range of $0.34 to $0.95 and approximately 14.7 million estimated diluted weighted average shares outstanding. We plan to open approximately 8 net new showrooms, plus or minus a couple, and expect capital expenditures of approximately $20 million.

For the first quarter, we estimate net sales of $133 million to $139 million. We expect adjusted EBITDA loss between $12 million and $16 million. This includes gross margins of 51.5% to 52.5% advertising and marketing of approximately 13% as a percent of net sales and SG&A of 51% to 53% as a percent of net sales. We estimate net loss to be between $14 million and $18 million. We estimate diluted loss per common share to be between $0.95 and $1.22 with 14.7 million shares outstanding.

In summary, we are 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 innovation that spans style, function and category to support a powerful multiyear secular growth outlook with macro upside exposure, a welcome accelerator whenever it finally comes.

With that, back to you, operator.

[Operator Instructions] Our first question is from Brian Nagel with Oppenheimer & Company.

Congrats on the ongoing progress here. So the first question I want to ask, just with regard to the, I guess, the sales outlook for the current fiscal year that you provided today. I mean, clearly, you're making clear that you don't expect the macro environment to turn into any type of tailwind. But I guess as you look at the range from the bottom to the top, what are the key factors that will determine where sales ultimately fall within that?

Brian, thank you for the question, and good to hear from you. So yes, I think as you called out, we don't see and haven't factored in any macro environment improvement. So we really are focused on what we can control. The first thing that we look at obviously, we have a clear path to knowing around our product innovation launches that are yet to annualize the new ones to come in their respective timing. So we're very clear on that part. We're very clear in terms of our showroom expansion as well as, as I touched on earlier, the next phase of the marketing and e-commerce transformation. The third is around our delivery services expansion and the expected incremental revenue is the kind of first time this year of rolling that out. So we've done some testing to that, but obviously, there will be variability. We know that's been a high friction point for our customers to convert, where they wanted to have the assembly capabilities provided by us.

So the great news is that we are going to be rolling that out. The timing and then the take-up of that does have some variability for that. So we assume similar competitive environment as well. So it really is around that range of that very new revenue driver that will shift the difference between what we anticipate in the range. And obviously, our intent always is to continue to gain strong market share as we demonstrated just last year and accelerate it. So looking forward to the year. The team are pumped actually in terms of all the opportunities ahead for us.

That's very helpful. And then my follow-up question, I guess, on the gross margin. Again, lots of moving pieces here. We started talking things last quarter about the re-shoring, if you will, bringing manufacturing back to the United States. So the question is we're looking at gross margins now and recognizing the ongoing tariff impacts, I mean, how should we think about over any length of time, the trajectory from here? Will the re-shoring effort, will those -- will that ultimately be a positive for gross margin? I mean, do you expect to mitigate some of these tariff costs in other ways going forward?

Thanks, Brian. It's a good question. I'll kick this off. When we think about the gross margins, there's a couple of things to keep in mind with the on-shoring program, which is it will take us some time, number one, to scale that production up and to flow it through our inventory. So when you think about things like tariffs, it's important to realize like when we pay those tariffs, what we do is we actually capitalize it and attach it to the inventory, which goes into our balance sheet, and then as we sell through, it flows through into our P&L. So we're really excited about what this potential is, and I'll get to that long-term opportunity in a second.

But as you think about the course of this year, by the time we get that inventory really flowing through the P&L as the production ramps, et cetera, et cetera, we're not going to get to see much of that benefit for this year. So like just to stick on this year for a second, what we're thinking about from a tariff perspective is all of the existing tariffs that are in place, we are no longer exposed to China-specific tariffs, which we're excited about, but we still have Section 122 and others. What we've built in for now is upon expiration of the 122 tariffs, we've made the assumption that there will be something else that will come in its place and approximate those rates for the second half of the year. So -- and we still have an annualization of the impact because it didn't hit the entire year last year, right? So put all those factors together, also some wiggle room around potential volatility in shipping rates. We've built-in some impact from that as well.

So I think we're pretty comfortable at this point that there are some room -- that there is some room for favorability, but there is also risk. We've kind of built -- we've built a number of these scenarios in place. Now as we move beyond fiscal '27 and into fiscal '28, yes, this is where we get more excited about some of the potential upside to gross margins that comes from a domestic manufacturing position and the flexibility it gives us to how do we think about things like overarching pricing, discount strategies, getting to the appropriate bottom line AOV for our customers to help us achieve the greatest market share gains with the greatest profitability. One of the other things that we'll be getting into at that time that we'll give you more details on at that time is the expansion into the new [indiscernible]. So there's a lot of flexibility that we'll have because of this.

There will also be a lot less volatility in our cost structure because we'll have less exposure to uncertainty owing to tariffs, to uncertainty owing to shipping rates, to less weeks of stock that will be required as we move more and more pieces into the domestic manufacturing realm. So we'll give you a lot more details on that as we get further through this year and start to get into next year. But yes, it is exciting to us to be in a position to optimize as we move into '28.

Our next question is from Thomas Forte with Maxim Group.

So Shawn Mary, Keith, One question and one follow-up. So can you talk about the relative gross margin and contribution margin for your e-commerce efforts Love by Lovesac versus sales of new merchandise?

Yes. Tom, thank you for the question. As you know, with us, Love by Loveac, we just started launching last year and rolling out on the resale side. And for us, we're now, I think, with 29 states, we're actually opening Arizona up next week. So then to your question in terms of -- from a gross margin perspective, compared to how we were managing open box inventory before, we have significant points upside in the benefit of being able to turn that inventory back around and be able to sell it at a higher rate of value than we were previously achieving.

So still a lot to learn in terms of customers' velocity around kind of pricing, which obviously drives from a gross margin perspective, and then also scaling it up. So it's not material today, but we do see that gross margin benefit over time. So excited. And then the second piece that we will be unlocking, which actually is really what we're excited about and we're starting that pilot this year is trade-in because we really see a huge amount of strength in terms of trading-in the product and obviously being able to sell that product once it's cleaned and sanitized for a gross margin.

But more importantly, then you give the customer a credit and then they trade up and buy even more from us. And that's just really the power of our platform. So whether they're buying an extra recliner chair, new covers and all the things that Shawn talked about that's to come, just the acquisition cost and therefore, the gross margin benefit that we're going to get through tapping into that opportunity is going to be very significant. But again, as we build this up, then we'll share more as this becomes more material.

And then for my follow-up, how should we think about your free cash flow conversion on your adjusted EBITDA?

Sure. So for free cash flow conversion, I think there's going to be a little less volatility than maybe you've seen in the last couple of years. We've got the inventory in a really solid position. Our processes are already lined up really nicely and in place this year. I think what I mentioned earlier remains the case, which is a slight inventory build year-over-year, but I don't anticipate a whole lot of other drivers of variance between, let's call it, our EBITDA and our free cash flow.

You'll notice that on the balance sheet here at quarter end, we have substantially lower accrued expenses and accounts payable than we did last year. So just to remind everybody, we built that inventory in Q4, a year ago. We paid for it in Q1, right? The cash flow for those bills were -- came due in Q1. This year, we have lower inventory. We have substantially lower accrued expenses and accounts payable. So there will be less cash allocated to paying off those bills in Q1 of this year. But those are really the only nuances. Everything else should be far less of drivers of variance.

Our next question is from Maria Ripps with Canaccord Genuity.

First, I just wanted to ask about Snugg. Now that the product has been in the market for more than 6 months, is there anything you can share in terms of sort of incrementality of Snugg customers on the platform? Are these mostly new customers or existing Sactionals buyers? And are you seeing any differences in engagement with the broader Lovesac platform between the Snugg and Sactionals customers?

Yes. Thanks, Maria. Great question. Snugg is off and ripping. We're so excited to have it in the portfolio. It's part of a bigger strategy to take more of the living room and to win the living room. You're going to see us on a number of products that will continue to layer on to help us achieve those ends. As it pertains to Snugg specifically, we're not ready to break it out as a business yet, but it is now more and more being -- you're going to see it more and more be positioned to be our entry-level platform. And in fact, as we've spoken about, it's going to be expanded on very, very soon here to become a full Sactionals platform. It won't have the same flexibility that Sactionals does intentionally, but does offer some unique characteristics like a solid rail. It's not split up into individual seats like most Sactionals furniture. It's a really unique platform in the landscape unlike any other Sactionals platform, has some really unique attributes.

So it's helping us already capture back some of that smaller ticket business that we spoke on earlier calls that we were struggling with in this current environment. And I think we believe once it's expanded into a more fulsome platform, it will help us mitigate those headwinds even more impactfully. On top of that, in terms of what you're asking about the customer, we're seeing success with Snugg, both with repeat and new customers. On the new customer side, we're seeing upside in urban markets where spaces are tighter. We're seeing upside with young families where not ready to make the commitment to Sactionals. And again, we're not breaking out that incrementality, but it's definitely meaningful to us and is here to stay.

And on the repeat business side, Snugg is so useful in other rooms of the home, in even in context with Sactionals, especially as an Accent Chair. We're really excited about the oncoming Swivel for that Accent Chair, we think that's going to be a huge unlock for that business. And that's all incremental because right now, when a customer is buying even a large Sactionals, there's often that nice space for an Accent Chair facing back, facing on a 45-degree angle, et cetera. And the Swivel really helps unlock that business for us. So we're really proud of the Snugg platform. We're even more excited about its future as a couple of these key product introductions unfold this year. And we'll round it out with another platform introduction, remember, at the high end and even bigger footprint in Sactionals. And we think that this at least three-tiered strategy will really help us compete for more business in the living room as we continue to layer on even a few accessory products to help us win there as well. So I appreciate the question and looking forward to more Snugg business very soon.

That's very helpful. And maybe related to that, sort of as your portfolio of products sort of expands from the core Sactionals to now 3 products, right? Can you maybe just talk about how that's impacting your marketing message? And just sort of how do you communicate with your customers about now these 3 different options that will be available on the platform sort of in the middle of this year?

Yes. Thank you. I mean you're witnessing Lovesac undergo a metamorphosis where we are brand focused, and we need to be brand focused. We've done very well with focused message around Sactionals, buy a bunch of seats, buy a bunch of sides, build anything you want. And that will continue to be a powerful marketing tactic for us, but it's no longer the strategy.

As a tactic, something like Sactionals that plays well on TV, amazing video has all these features and benefits will always be a powerful tool, and you'll see us use this tactic as we expand into other categories and even rooms. But our overall goal for this brand is to evolve into a lifestyle brand. If we're going to do that, our advertising communications need to become more emotional, more brand-focused overall and built around a strategy to achieve those ends. And so as it pertains to Snugg and these other platforms, we certainly will lower funnel where the focus is not establishing the brand and driving awareness for the brand, lower -- mid- and lower funnel, we will -- you will see Snugg ads, you will see new platform ads, and they will be product-focused with the point being conversion. And the opportunity there for us that we see as real upside is at the moment, so much of our communications because we are spending a significant amount of money on marketing, right? We are not a retailing merchant with a tiny ad budget. We are a marketing-driven engine.

And so much of our communication is around a discount. It's around a sale. And it's around one product, just being frank. And so having this multi-tiered product strata now allows us instead of offering, for instance, as you've witnessed, 30% off or it's up to 40% off. It now can be an up to message and you're starting to see that fold in. It will allow us to offer discounts on certain products and not discount some products that we know, the higher-end consumer is willing to pay full price for or closer to full price for on holidays. And so we've really lacked for dynamism in our marketing messaging because of our focused catalog. And while we, on principal, will never become unfocused, we got to remember that we're still generating a Sactionals Sofa business, Snugg and Sactionals combined that eclipses most of our largest competitors' entire upholstery businesses.

And so to get that from 2 and then maybe even 3 platforms is still pales in comparison to the who knows, 20, 30, 40, 50 sofa sactional designs that some of our competitors offer. So we'll stay focused overall, but we are diversifying and it really will make the business more dynamic, we feel going forward.

Our next question is from Eric Des Lauriers with Craig-Hallum Capital Group.

Congrats on the continued progress here. So overall, it seems like the reorganized marketing teams and e-commerce teams and then the enhanced field incentives and the showrooms that you touched on, on the call, it seems like those are really having a material impact, helping you gain share, drive positive comps. Could you just kind of help frame where we're at with both of those in terms of how much further impact you expect from these initiatives? Are they sort of fully rolled out? Or do they have more room to scale?

Eric, thank you. Yes, great questions and connecting them all together. So let me start actually kind of with the field incentives, and then I'll come back to the reference around the marketing team overall, including e-com. So as I referenced earlier, we started testing in quarter 4 with a sharpened incentive program. Everything 100% is driven around the showroom performance. So it's a team effort in the showroom, and we want to maintain that, but it is all about their performance where prior to that, it was a lot more around total business performance with some blend of individual showrooms. So 100% around that, but with a much higher upside based on over performance.

So we saw a great performance in quarter 4, that was a pilot to help us inform us for our strategy for this year. And actually, we've risen up in terms of the overall cap in terms of their performance. And just talking to the field, they love it. They feel very motivated and they see a very linear path around how much more they can earn based directly related to their performance. So I think I would say that we're receiving some of that impact of that program, but you will see more to come as we kind of transition, I would say, over the next couple of quarters to really see the full momentum.

And the second part that kind of dovetails into it is also just our ability to hire the best salespeople out there in the market. And I think this is highly attractive to those that really do over-perform. And we want them and welcome them all to Lovesac. So we're coupled with some training programs, we see a lot of potential. And then I think back to your question on marketing, obviously, I think we announced before Heidi and the team had undergone a reorganization back in September last year. And that was really about bringing marketing all together under Heidi's leadership, including e-commerce, bringing all of media collectively under one leader as well. And we're really starting to see that total view around the customer acquisition optimization coming into force.

But I would say anything such as this does take time. So we have baked in upside through this year. We're already seeing that through the marketing performances at the beginning of this year in Q1, and we continue to expect that to build out. So more to come, but really appreciate that team's leadership. The modernization of what they're doing is really good. But I think even just some of the brand storytelling, connected to a tentpole moment and being very relevant to our customers, just really shows the sweet spot that Lovesac can play in. So we look forward to sharing more with you as we report next quarter. Thanks for the question, Eric.

That's very helpful. And then just a kind of high-level level-setting question for my follow-up. On the showroom expansions, you previously guided to 10 net new in fiscal '27, now 8, obviously materially down from previous quarters. How much of this is sort of a temporary strategy around macro headwinds that will reaccelerate in future years? And how much of this is just kind of reaching saturation or critical mass and in which case, we should expect kind of a lower range to be the new normal going forward?

Yes, great question. So just to address the second part of the question first, it is not a saturation issue. It is really an offensive move to think about what the optimal showroom or store of the future might look like that best represents our ambitions in this metamorphosis as Shawn talked about, transitioning from a product company to a brand. We finished the brand evolution work. We're now rolling it into all the other things that you've heard throughout this whole call. So we're taking a minute here to redesign a flexible suite of asset options that include various elements that can be pieced together in different ways, whether it includes heavier focus on, let's call it, Sactionals or Snugg or Sacs or the new room that's coming next year. We're already working on elements of that.

And I think what we want to do is to let the data drive it. We're going to open some different kinds and different formats and different expressions, maybe some flagships, maybe some stand-alone and maybe some hybrids, and we're going to let the data tell us. But I think what I would kind of ground you in is this principle that Mary mentioned, which is we look at everything from a market share perspective. What market share do we think we can take? Then the second question is what's the most efficient way to take it?

If the most efficient way to take it, is through a different type of expression than what you see right now, a blend of these asset options, great. If it becomes a lot of showrooms substantially more, great. We'll do that. But we're going to let the data drive us. And I think, again, we go through our customer acquisition engines are put in order on purpose, right? First things first, biggest, best store, 365 days a year, 24 hours a day, most of our customers go there, lovesac.com. That's got to be amazing. But we know some of our customers need to touch it, see it, feel it, just experience. So we'll have these really amazing customer experience centers in our stores.

And then we'll compound all of that through highly efficient partner channels as well. That's kind of the mindset we go through. So we think this is a great approach for now while we get all our ducks in a row as part of this transition. And then we're going to let the data drive what the optimal execution is to take that market share most efficiently.

Our final question is from Matt Koranda with ROTH Capital Partners.

I guess just wanted to fit the first quarter sales guide into the full year. So curious what you've seen maybe in February and March on traffic and conversion to date?

And then presumably, I guess, the implication of the full year guide would be you get back to growth later in the year to hit the midpoint of the full year sales growth guidance. I guess why are we confident in assuming improvement later this year? Just talk about the drivers that give you confidence in the return to growth.

Yes. Just to start with the quarter, sort of to date, just to give you some perspective, because I think sometimes we do vary a little bit differently from the category given the timing of our tentpole promotions and things along those lines.

Look, we had good strong performance around President's Day. It outperformed our expectations. It's a great first month to our quarter. This was offset a little by a weaker second month. We had this valley sort of between the President's Day holiday of the first month and then Easter coming in the third. But we've got a really good strong pipeline of quotes that we are going to activate against as we enter into the Easter selling season. So what we've done, good strong first month, a little bit weaker valley in between the promotions, but a lot of confidence as to how we're approaching things.

Look, I do want to highlight one quick thing that does make the Q1 look a little bit different maybe, than it would appear at first glance. We're going to have a little bit of a onetime shift between demand and revenue in Q1 based on our rollout of these new delivery service options that Mary mentioned, the Rule of Choice and White Glove. The reason is because we expect that some of our customers or even many of our customers, they schedule the delivery further out than our normal fast and free, which is about a week. What this means is we're preparing for a little bit of an increase in our order backlog at first quarter end. But it's just timing, not demand.

These are in the backlog and are expected to convert soon after. The impact gets exaggerated a little bit in Q1, given it's our lowest quarter from a seasonality perspective. And look, we don't expect a material impact on the full year. So just to summarize that Q1 demand sales, if you think about it from our guidance, are projected to be flat to growing versus Q1 last year with revenue slightly lower than demand owing to this matter. So it maybe exaggerates the quarterly cadence a little bit, but we do think net-net and over the course of the long term and the year, it's a positive development.

Okay. That's helpful. And then do you want to talk about later this year just in terms of the assumptions, maybe new product launches and whatnot that factors into the return to growth?

Yes. I think Mary talked about this earlier, and I think she covered it really well. It's the product innovation timing. It's the marketing and e-commerce transformation and the benefits we get from that. It's the ramp-up of the delivery services and the whole related halo effect that, that can drive. And then the quarterly cadence issue I just talked about with the shift between demand and revenues on this timing shift for the delivery service options. I mean, honestly, really, that's it. The only other wildcard that comes into play here is a little bit of the promotional variance that can have an impact outside of core category growth. But I think those are really the items.

Yes. And I'll just jump in and add a little qualitative piece. I think that as the year wraps up, Matt, if we could fast forward 3 quarters, 4 quarters, you will have seen this coming year as the most prolific year in Lovesac product launches in our history. And the reason for that is we're gearing up to propel ourselves into this new room that we've talked a lot about. That's a multi, multiyear investment. It -- and we expect it to be quite consuming and a major leap forward for the business a year away.

As we prepare for that, there are a number of moves that we feel necessary to really shore-up our position in the living room, compete stronger and really solidify that base before that new room takes so much of our focus and energy. And so it's really driving us to push a lot of things over the finish line that we're very proud of actually and been thinking about for a long time. And it's just going to be a really exciting year, we think. So while no doubt, we've been under pressure as a stock for a long time, we've definitely been cooking in the back room for a long time, spending a lot of money on innovation and not just in the product realm, in the services realm, all these things will really start to culminate towards the end of the year. And I think that, that gives us great confidence in this plan that it's essentially not a ton of growth by Lovesac standards. But in this environment, if we can pull that off, we'll feel like it's a good foundation to build on for all the even more exciting stuff to follow after that. So we appreciate your patience, and that's a great question.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Yes. Thanks so much to all of our investors that continue to support this brand, keep us energized, challenge us. Thanks so much to the #Lovesac family that is our lifeblood and so much energy and confidence and expertise going into building our future together. Have a great day.

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

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 4 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 3 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 3, 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 3 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 3, 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 3. Our bundled offers now include the Snugg Sofa and an accent chair, Sactional's reclining seats and 5 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 2, 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 1 next year and hope to roll out the trade-in program to customers starting in quarter 2. 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] One moment while we poll for questions. Our first question is from Thomas Forte with Maxim Group.

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?

Tom, thank you for the question. So yes, 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 kind of 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.

Our next question is from Michael Baker with D.A. Davidson.

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?

Yes, 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 kind of 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 3 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.

Yes. 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.

Our next question is from Eric Des Lauriers with Craig-Hallum Capital Group.

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 sort of naturally a greater impact on Internet sales versus showroom? Can you just provide a bit of color on sort of where the revenue weakness is coming from? Would be helpful.

Eric, thank you for the question. Yes. 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 3. 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 4. 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 sort of expect this to take? How long you expect to sort of 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?

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 3 into quarter 4, a lot more around programmatic digital channels. That's all real time. That's happening right now, and we contribute the quarter 4 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 kind of pivoted and made some of those adjustments. So that is all kind of 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 1 and quarter 2 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.

Yes, 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.

Our next question is from Matt Koranda with ROTH Capital Partners.

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?

Matt, thank you for the question. Let me start with the second one and then I'll come to kind of the cadence in Q3. So yes, 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 4. Then to your question, kind of going back to quarter 3, 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 kind of 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 3, 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 4, the adjustments we made both in terms of promo cadence, we simplified. We were bolder, clearer. But instead of having kind of 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 yesterday 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 3.

Okay. Very clear, 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?

Yes. 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.

Our next question is from Brian Nagel with Oppenheimer & Co.

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 kind of 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 U.S.?

Yes. 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. Yes, 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.

Our final question is a follow-up for Thomas Forte with Maxim Group.

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?

Yes. 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 U.S., 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.

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.

Greetings, and welcome to the Lovesac Second 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 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 today by sharing a high-level overview of our second 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 Q3 and fiscal '26 outlook.

Turning to our second quarter. Overall, we are pleased to have delivered results in line with or slightly favorable to our expectations across all metrics, representing another quarter of top line growth driven by our secular growth initiatives across Designed for Life product platforms and efficient customer acquisition engines.

For the second quarter, total net sales were $160.5 million, reflecting a year-over-year increase of 2.5%. These results reflect market share gains despite the ongoing headwinds facing our category, which we estimate declined approximately 4% for the comparable period. Total omnichannel comparable net sales increased 0.9% for the quarter, with additional growth coming from new and noncomp touch point contributions. Our balance sheet remains very healthy with inventory levels and net cash providing substantial flexibility to weather tariff distractions, accelerate growth and enhance returns on capital.

This is a very exciting time for Lovesac. While the home category and high-ticket consumer goods in general have been under pressure for years now, with many in our industry waiting for an eventual recovery to the housing market and a normalized furniture replacement cycle, we've been both controlling expenses for efficiency and protecting significant investments in innovation to create meaningful long-term value for all stakeholders. And we've done this while maintaining annual profitability and a very strong balance sheet.

In our December 2024 Investor Day presentation, you may recall, we used the analogy of an oaktree to represent the brand that we are focused on building here at Lovesac: wide, tall, strong and durable. Currently, the outside world sees only a few of the branches of this tree, namely the Sactionals and the Sacs, along with a few accessories and ancillary products around the edges. But we promised new branches over the next coming years, some representing entire new rooms of the home. It was then that we unveiled the first new platform launch or brand-new branch to this tree, a platform still in the living room, the EverCouch. The new EverCouch is in the midst of its debut with new, fresh advertising support rolling out right now. Mary will speak to our observations and successes with EverCouch in more detail in just a few minutes.

But as we refined our strategic road map for this pivotal transition from a product-focused company to a true brand, it became clear that we needed to sharpen and focus our positioning through a brand evolution refresh for Lovesac. This brand evolution work has been going on over this past year in collaboration with a world-class branding and design firm. And it's been fortuitous that our talented new CMO, Heidi Cooley, is fully onboarded now and able to spearhead this effort to its completion. This work has laid a clear and reliable foundation where we can build Lovesac into a multifaceted home brand with an organized and prioritized product hierarchy and merchandising strategy. This will not only allow us to confidently extend the brand further, but also deeper into the categories where we already have strength in order to compete even more vigorously for market share.

To that point, we see many opportunities to rapidly harvest Lovesac brand equity, earning more revenue and margin dollars from existing markets and customers through incremental new product development and channel expansion. We believe this is our fastest and most credible path to more profitable and secular growth in the near term as we strengthen the core at Lovesac, even before we utilize this broader framework to compete in the new rooms in pursuit of the more radical growth opportunities that are still more than a year away.

This brand evolution work and new product hierarchy has also led us to rethink everything, from new product naming to some new products themselves, and the channels through which some of these new and even existing products can and should be offered. More to come on that, but yes, we see significant new channel opportunities, particularly with some of the new products that we are close to announcing that are still in the living room space.

Meanwhile, to better align with this new product and channel strategy, we have chosen to rename the EverCouch product line to be called Snugg by Lovesac. The advertising went live this week with a fresh new look and feel, as you will likely see on TV and digital platforms over the next few weeks. It suits the product better as the Snugg product line, consisting of the Snugg sofa, the Snugg loveseat and the Snugg chair, is everything that Lovesac has to offer. It's washable, upgradable, shippable, movable, snuggly and comfortable, but in a bit smaller package that can always fit any space and look forever new.

We're excited about its performance to date, and its rollout recently expanded to 100 of our physical locations already. We promise to share in more detail the results of our brand evolution work, our product road map and hierarchy and channel strategy over the coming quarters as we bring incremental elements to life. But rest assured, while we are proud to have taken significant market share even in these tough years for the category. Remember, we were recently ranked #19 on the largest home furnishings retailer list by Furniture Today. Our ambition is to be much larger than that. We've made significant and fundamental investments in this brand and in new products that you are going to see unleashed in the marketplace, starting now with the Snugg product line and with more to come in subsequent quarters and years.

Turning to the macro. We've seen a very slight improvement in the category, with overall furniture spend down 3.7% from May through July, with July being the best of the 3 months. It's too soon to count on July as a bend in the trend since we've seen stronger months arise occasionally in the past year. As such, our baseline for planning purposes remains unchanged from our initial outlook, which is a full year furniture category that is down mid-single digits.

As for net sales, we remain focused on what we can control. Like I said earlier, we aim to leverage our secular growth initiatives to drive growth. We grew in the fiscal first and second quarters, and as Keith will detail later, we forecast growth for the full year, even without the category supporting us within our original annual net sales guidance.

As for profitability, these are very unusual times with the rules changing on us regularly, especially as it pertains to tariffs. Last quarter, we highlighted that barring materially different scenarios, we felt we could cover the potential impact of tariffs, increased competitive discounting and the Best Buy exit fees with our previous annual guidance. We have numerous tools available to us given our unique model with high product margins, geographic redundancy and strong vendor relationships.

We've made solid progress on mitigation factors, including select price increases taken early in the fiscal third quarter. However, with incremental worsening in the tariff backdrop and continued pressure on competitive discounting, we have lowered our gross margin range, which has impacted the bottom line ranges accordingly. Importantly, we have identified additional measures that will benefit gross margins beginning later this year as well as over the coming quarters, which we believe will support the high 50s near 60% level we previously discussed over time.

Keith will provide our updated guidance ranges in a few minutes. But in short, we estimate fiscal '26 to be another solid year of market share gains with absolute growth in a down category. Through selective pricing, tightly managed controllable expenses and efficiencies in marketing spend, we believe we can expand bottom line profit margins and dollars to the midpoint of the range and end the year with a strong foundation for the future.

In conclusion, we are committed to delivering on our objectives, leveraging Lovesac's innovative product offerings, strong consumer relationships and operational excellence to grow irrespective of the category in the near term, while maintaining clarity around long-term thinking and value creation.

Our refreshed brand evolution work now unlocks the next phase of execution against our ambition of reaching our goal of 3 million Lovesac households by 2030 and building the most loved home brand in America. And while we aren't sitting around waiting for it, we believe that when the replacement cycle for comfort seating ramps up and housing turnover reaccelerates, which is one day closer than it was yesterday, Lovesac will be ready to capitalize on it immediately. This added revenue growth should drive even more flow-through of top line growth to bottom line growth and additional margin expansion beyond that, that is supported by our secular initiatives.

Finally, I want to thank our dedicated team members who work tirelessly to bring our innovations to market and deliver an exceptional customer experience. Every one of you is helping to reshape the home furnishings industry with products that are designed for life, and thereby creating long-term value for all stakeholders.

Before I hand it over to Mary, we'd ask everyone on this call for a moment of silence to remember the victims and survivors of the 9/11 attacks, the brave men and women who responded that day and the families who continue to grieve. We'll do that now.

Thank you, Shawn, and good morning, everyone. Building on Sean's overview of our Designed for Life platforms and our strong results for quarter 2, I'll now focus on our second super power, our customer acquisition engines that are uniquely tailored to each of our Designed for Life platforms as well as our growth enablers that are fueling our momentum.

As a reminder, what makes our customer acquisition engines so powerful, a superpower 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 optimally affect 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.

Starting with brand and performance marketing. Shawn shared some initial highlights of our brand evolution work and what's to come. And you'll see a lot more of this work cascade through marketing in coming quarters. That said, we are already beginning to optimize our marketing mix as we build awareness of our brand and excite our customers, both with our core Designed for Life platforms and our new innovations.

In quarter 2, we leaned into mid-funnel tactics. Encouragingly, traffic and return on our spend increased versus last year, driven by a refocus on DTV and YouTube, with plans to expand these partnerships in the second half of the year, as well as leveraging answer engine optimization with Google and Microsoft.

Our social media and partnership team did a stellar job in quarter 2, keeping Lovesac on the forefront of culture, spanning all of our product lines. We partnered with influencer and author Eli Rallo to host an on-trend book talk-themed event at Bibliotheque in New York City. Key editors and influencers attended to experience the PillowSac chair firsthand, and listened to a special reading from Eli's upcoming book release, garnering over 227 million earned media impressions and 1.1 million social media impressions from 51 influencers.

We also had 2 amazing partnerships in quarter 2 for the final week of the 2025 FIFA Club World Cup, Michelob ULTRA and Lovesac popped up at the Pitchside Club in New York City. The Lovesac Lounge was the ultimate company spot to watch the matches, complete with Sactionals with StealthTech and custom Michelob ULTRA soccer ball-themed Sacs and [indiscernible].

We then collaborated with Van Leeuwen, a Brooklyn-based ice cream brand for their National Ice Cream Day campaign that celebrated the tenth anniversary of their best-selling flavor, Honeycomb. We created 3 limited edition Van Leeuwen ice cream sac covered inspired by their fan favorite flavors, including Honeycomb, Strawberry and Sicilian Pistachio. This was a 360-degree partnership with PR influencer events, organic social e-mail, SMS coverage and website placement, and garnered over 40 million total earned impressions.

Lovesac's unique positioning, combined with activation capabilities, allows us to move quickly at the speed of culture. And in quarter 2, we jumped into viral trending topics such as Coldplay [indiscernible], Love Island and Labubu, which performed 2x stronger than our benchmark.

Before moving on to our digital configurations, let's spend a minute talking about our most recent innovation, Snugg, a massive opportunity for us, which puts Lovesac squarely into the $14 billion couch category. This new product line, which features not only stylishly adaptable couches but also loveseat and chair options, was soft launched in quarter 2 in 27 showrooms and on lovesac.com, with a learning agenda focused on our selling experience. Initial results from the soft launch look promising, and this will build as we've already expanded the number of showrooms in quarter 2 to 100 and growing.

However, beginning earlier this week and with full rebranding in place, we launched our formal marketing campaign. You'll see many of the branded performance marketing elements we've already discussed coming to life. It all begins with an engaging campaign, leveraging one of the hottest and culturally relevant celebrities, Brittany Snow. This is just the beginning of many new ways we plan to effectively build Lovesac into a multifaceted home brand that is trusted and loved by customers, all informed by the brand evolution work we're completing, and we look forward to sharing more in coming quarters.

Second is our digital configurations and how we bring Lovesac to life online. As we launch new product lines, including Snugg, we continue to invest in optimizing the digital experience. Through our research, we know that customers shop differently sectionals for versus couches and chairs, and our digital team undertook the extensive testing of both the website and homepage design. And as a result, we significantly improved the top navigation, implementing a more intuitive design based on furniture shopping behaviors and quicker product finding. Since launch, customers are more engaged and they're converting at a higher rate with improved balance rates, all contributing to one of our highest recorded digital customer satisfaction scores in quarter 2.

We also continue to advance our customer reengagement center, MyHub, always with the goal of being a frictionless omnichannel experience for new and repeat purchases. In quarter 2, over 20% of EverCouch, now Snugg transactions were from existing customers, which further illuminates the opportunity for us to connect with our current customer base as we launch new products.

Third is our showroom experience, the physical brand amplifiers of our Designed for Life products and the linchpin of our omnichannel model. In quarter 2, following on from the soft launch of Snugg in 27 locations and lovesac.com, we continued our expansion of this product line to just over 100 locations at the end of quarter 2, with the plan to complete the balance of the chain in quarter 3. To support this exciting new program, our training and operations team, along with Shawn, conducted full day hands-on training sessions across our key markets. Early results are encouraging, and we've seen customers adopting this new platform even ahead of our national launch campaign.

In addition to the update to performance-based compensation that we shared in quarter 1, we've advanced our assets provide performance visibility across the field in quarter 2 through the launch of improved performance dashboards. We're supporting our retail chain through improved visibility into sales and team performance, labor efficiency and customer experience. We've also launched a digital quote management tool, which not only supports increased quote conversion, but also strengthens the omnichannel customer experience through the delivery of consistent quote follow-up and communication nationwide.

Finally, complementing our showrooms is our partnership model. As we shared in quarter 1, we've continued to evolve our thinking to support our customer acquisition engines, which includes enhancing our focus on more profitable growth and improve customer experiences. This led us to end our Best Buy partnership, which we outlined last quarter. I'm pleased to share that we've successfully completed our Best Buy exit on September 2, ahead of plan and under budget.

In regard to our Costco partnership in quarter 2, we piloted and scaled an enhanced cost display model that elevates the Lovesac experience within a compact footprint. Updates included the addition of StealthTech demonstration capabilities supported by a new StealthTech video test in 2 key markets, which is planned to expand to new markets throughout the remainder of the year. The updated power design optimizes the footprint, creating space for client demonstrations and the addition of the subchair. These enhancements position us to flex our assortment and deliver enhanced customer experience throughout our Costco roadshow event.

When combined, these 4 elements of our customer acquisition engines create an unmatched customer experience that drives brand love and enables long-term relationships, and we are reinforcing this even further with our customer-facing services. Since our quarter 1 launch of Love to Buy, Love to Give Back in Texas, our new resale platform has rapidly expanded into 5 additional states, giving even more customers access to pre-loved products.

With additions like the PillowSac chair and StealthTech combinations, we're not only expanding our range offering, we have laid the foundation to unlock trading capability for our customers. This will begin with a customer pilot later this year, and will ensure a seamless experience before scaling next year. And all of these actions strengthen our value proposition of Designed for Life products that are built to last, designed to evolve and ready to be loved again.

Key to us sustaining this long-term profitable growth are our growth enablers within our supply chain playing a pivotal role. As I shared before, our supply chain is purpose-built for scalability and designed to support new product and platform introductions. Our team has done a terrific job, both in transforming our supply chain and also delivering strong progress in mitigating the industry-wide exposure, tariff costs as evidenced in the outlook that Keith will share shortly.

To address tariff headwinds, we deployed a 4-point mitigation plan back in April, and I'm pleased to report strong progress across all fronts. The first is focused on managing costs by working with our long-term vendors for concessions. We've received support from every key vendor enabling us to reduce costs. Second is manufacturing diversification, including the work to further diversify manufacturing away from China with our long-term partners. We remain on track to be mid-teens for China for the full fiscal year, but with an exit rate well below that.

Third is strategic pricing. And as I shared before, we executed some informed price increases. These increases were determined following a deep dive into our overarching competitive price positioning against numerous options in the consideration set for our customers. We feel very comfortable with where and how Lovesac is now positioned, appropriate for the quality, style, features and benefits each of our products has to offer. Additionally, the work helped us better understand the elements of our value proposition and we immediately developed and rolled out training and tools throughout the field organization, making it easier for all of our team members to convey to customers the specific value inherent in our Designed for Life product platforms. And the final initiative for us was cost efficiency, and we've achieved and continue to identify cost savings across the business.

Lastly, I really want to recognize our team for their swift and strategic execution. Thanks to their efforts, we believe that this 4-point plan will mitigate the majority of the current tariff pressures.

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

Thanks, Mary. Let's jump right on into a quick review of the second quarter, followed by our outlook for the rest of the fiscal year. As we begin with performance metrics, please note that all references to the second quarter refer to fiscal '26, unless otherwise noted.

Net sales increased $3.9 million or 2.5% to $160.5 million in the second quarter compared to the prior year period. Showroom net sales increased $10.3 million or 10.4% to $109.1 million in the second quarter compared to the prior year period, driven by an increase of 0.9% in omnichannel comparable net sales and the net addition of 16 new showrooms. Internet net sales decreased $1.8 million or 4.1% to $42.5 million in the second 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 $4.5 million or 33.6% to $9.0 million in the second quarter compared to the prior year period. The decrease was primarily attributable to the company's decision not to engage in any part of transactions during the current period.

By product category, in the second quarter, our Sactionals net sales increased 4.6%. Sacs net sales decreased 22.5% and our other net sales, which includes decorative pillows, blankets and accessories, increased 2% over the prior year.

Gross margin decreased 260 basis points to 56.4% of net sales in the second quarter of fiscal '26 versus 59.0% in the prior year period, primarily driven by increases of 110 basis points in inbound transportation costs, 50 basis points in outbound transportation and warehousing costs and a decrease of 100 basis points in product margin, driven by higher promotional discounting.

SG&A expense as a percent of net sales was 44.9% in the second quarter of fiscal '26 versus 47.0% in the prior year period. The decreased percentage is primarily related to lower professional fees, credit card fees and other overhead costs as well as higher net sales. The improved expense leverage compared to our prior guidance reflects tighter expense management as well as lower Best Buy costs during the transition period and tied to the final exit of the relationship.

On that front, during the quarter, we incurred approximately $1.9 million of total nonrecurring expenses related to the exit of our relationship with Best Buy, inclusive of fixed asset impairment closure and payroll expenses. Despite this expense, we reported a decrease in selling, general and administrative expense dollars. This was primarily related to decreases of $2.1 million in professional fees, $0.5 million in credit card fees and $1.7 million in other overhead costs, partially offset by $1.5 million of impairment charges related to the Best Buy partnership termination and increases of $0.6 million in payroll, $0.5 million in equity-based compensation and $0.1 million in rent.

Rent increased by $0.1 million related to a $0.5 million increase in rent expense from our net addition of 16 showrooms, partially offset by $0.4 million reduction in percentage rent. We estimate nonrecurring incremental fees associated with the restatement of prior period financials were approximately $0.4 million in the second quarter.

Advertising and marketing expenses increased $0.2 million or 0.7% to $23.5 million for the second quarter compared to the prior year period. Advertising and marketing expenses remained relatively flat at 14.6% of net sales in the second quarter as compared to 14.9% of net sales in the prior year period.

Operating loss for the quarter was $8.8 million compared to $8.4 million in the second quarter of last year, driven by the factors we just discussed.

Before we turn our attention to net loss, 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 $6.7 million or negative $0.45 per common share compared to a net loss of $5.9 million or negative $0.38 per common share in the prior year period. During the quarter, we recorded an income tax benefit of $2.1 million as compared to $1.8 million in the prior year period. Adjusted EBITDA for the quarter was $0.8 million as compared to $1.5 million in the prior year period.

Turning to our balance sheet. We ended the second 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 $34.2 million in cash and cash equivalents while retaining $36 million in committed availability and no borrowings on our credit facility.

First, our total merchandise inventory levels are in line with our expectations that we outlined last quarter. We began reducing excess core inventory levels in the second quarter, which helped offset the working capital required for building EverCouch, now Snugg, weeks of stock. 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 lower dollars of inventory than not held at the end of both the second quarter and 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 in macro backdrop owing to tariffs and consumer spending in the near term, we did not repurchase any of our common stock during the second quarter. Year-to-date, we've repurchased 6 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 second quarter financial performance.

So now for our outlook. As Shawn, mentioned, we experienced modest but not overly material improvement in category trends in the fiscal second quarter, but nothing significant enough for us to alter our assumption and our plans for a 5% full year category decline. While our new ranges imply improving net sales growth rates in the fiscal fourth quarter, we have many secular tailwinds helping counter the category outlook and providing optimism. These factors range from annualization of fiscal '25 major product launches, our recent launch of Snugg with the marketing program having just launched this week, a broader reboot of our marketing strategies informed by our brand evolution work that Shawn, just discussed, growth in physical showrooms, more compelling financing offers through the Lovesac credit card and an easy comparison given missteps during the Cyber 5 holiday period last year.

For the full year fiscal '26, we are tightening our net sales guidance range to reflect 4% to 9% growth for the fiscal year. We are also favorably adjusting our forecast for controllable expenses within SG&A and for efficiencies in marketing. However, while we have made great progress managing the impacts of ever-changing tariffs, and to an extent, competitive discounting pressures, our guidance ranges assume some pressure from gross margins flow through to adjusted EBITDA, net income and EPS. These will be most pronounced in Q3. We have identified additional measures that we expect will benefit gross margins beginning in Q4 and supporting a path to achieve the high 50s, near 60% level we've previously discussed over time.

Specifically for the full year, we estimate net sales of $710 million to $740 million. We expect adjusted EBITDA between $42 million and $55 million. This includes gross margins of 57% to 58%, advertising and marketing of approximately 12% 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 $8 million and $17 million. We estimate diluted income per common share in the range of $0.52 to $1.05, and approximately 16.3 million estimated diluted weighted average shares outstanding.

For the third quarter, we estimate net sales of $151 million to $161 million, representing mid-single-digit revenue growth at the midpoint and representative of our near-term plans for tariff mitigation. We expect adjusted EBITDA loss between $1 million and $7 million. This includes gross margins of 56% to 57%, advertising and marketing of 14% as a percent of net sales and SG&A of 47% to 49% as a percent of net sales. We estimate net loss to be between $8 million and $12 million. We estimate basic loss per common share to be $0.51 to $0.83, with 14.7 million weighted average shares outstanding.

In summary, stabilization of the category and an eventual return to category growth are ahead of us, even if that timing is unclear at the moment. In the meantime, we are 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 are building the Lovesac brand and investing in new product innovation that spans style, function and category to support a powerful multiyear secular growth outlook with macro upside exposure is icing on the cake.

With that, back to you, operator.

[Operator Instructions] Our first question comes from the line of Maria Ripps with Canaccord Genuity.

First, so as you undertake your brand evolution sort of refresh, do you anticipate any changes to the customer acquisition approach or maybe marketing effectiveness here in the near term?

Yes. We have so much happening on the brand and marketing front, that I think that's going to be a major theme actually for the next few quarters. We have, as you noticed, brand refresh, just coming to prime time. We had this Snugg campaign that launched this week. And we have a new CMO onboard, who's insanely talented and really excited to be taking those controls. And so I think that you're going to see a lot change in the way that we go to market Lovesac and the way we deliver our advertising and the way we communicate.

And I think you can already see it reflected in this campaign with Snugg, which is really unique. We've got one of the hottest celebrities out there right now representing this product aligned with the brand. You'll be seeing Brittany Snow on all the social channels. You'll be seeing a lot of really -- not just exciting creative, but a new aesthetic to it. And I guess the cool part is, is because of the timing of that particular launch, at least force through a lot of the change in tone in the way that we go to market and spend our money to reach prime time faster even with Heidi Cooley's more recent onboarding. So it's all coming together great.

And Mary, I don't know what you might add on customer acquisition and our spend.

No. I think Maria, as Shawn, said, you'll see it -- hopefully, you got to see the Snugg campaign launched earlier this week. And it's just so critical for us in terms of kind of the campaign is around showing the couch category that anything they can do, we can do better. And I think we're just getting a lot more confident and clear in our messaging around our value proposition and really how do we find the eyeballs that are -- considering a purchase in their home and how we get them to see us as the right choice and to be able to convert them.

Meanwhile, we continue to just build the full funnel as we always have, and you see that in our results in terms of the success of continually gaining market share for everything. But every platform we have, we're just very targeted in how we approach it. And as Shawn talked about some of the work under brand evo, we've built out a very clear product hierarchy, we'll share more with you over time, and it's just going to enable us to be a lot more targeted in terms of how do we maximize the potential for all of our products, whether it be in all of our showrooms or even honestly, just getting a much greater level of velocity on our website. So it's just been really good work to really help us be able to pull open the brand in this multifaceted strategy that we have for the home, and we'll be delivering over, as Shawn, said, the coming weeks with all the campaign and then months and years as we really are building this for the long term. So thank you for the question.

Got it. That's very helpful. And then I wanted to ask about Snugg and sort of now that the product is launched in more than 100 showrooms, can you maybe help us think about sort of the type of partnerships or distribution partnerships that would be sort of most complementary for this platform?

I think it's too early to speak to any specifics. But let's go to first principles. It's always where I'd like to start. The reality of Sactionals is that it is a wildly -- it is the simplest wildly complex product platform you could imagine, right? Just -- buy a bunch of seats, buy a bunch of [ side ], build anything you want. It could be deep, it could be long, you have pillows and all of a sudden, the platform has complexity that is really, of course, indicative of its Designed for Life nature, right? This is a good product to be within the rest of your life.

Snugg is much simpler. You still get almost all of the Lovesac benefits you're used to, right? It's washable, it's somewhat changeable, but it doesn't require the intricate demo in-person experience that, for instance, Sactionals has. And this product platform's ability, therefore, to appear, perhaps in environments that aren't Lovesac owned and operated and staffed, is apparent. And it's really influenced our thinking about future products as well. You could imagine future products more analogous to Sactionals that deliver an extremely high Designed for Life ranking, but that requires some handholding and some demonstration. And you can imagine more products like Snugg that represent the brand well, have the best quality, but don't require such intimate demonstration experiences.

And so the first and most important channel for Snugg is our website. This is a beautiful sofa that sits amazingly well, has storage big enough to fit Brittany Snow in it. As you'll see, you're climbing inside of it actually in some of the campaigns, it's pretty funny. And -- but represents the brand well, but doesn't necessarily need as much demonstration and whatnot.

So I'm giving you a haphazard description of this product hierarchy that we are not haphazard about. We have now a much clearer picture of how we can deliver sales and to that end, expand our channel strategy with these products that don't require in-person demos. That's the key to it. And so I'll just leave it at that because it's too soon to announce these partnerships, but we are excited about both online and off-line opportunities with products that can represent the brand in this way.

Our next question comes from the line of Mike Baker with D.A. Davidson.

Okay. Can you talk about a little bit more detail on what has changed in terms of the EBITDA outlook versus a few months ago? You said tariffs, you said promotional activity. Is one of those bigger than the other? And on tariffs, maybe -- I don't know if you can help us with a little more specificity. I thought sort of tariffs are coming in lower than expected. At 1 point, we're expecting over 100% in China. So what other tariffs is worse than expected? And how much of the reduction in guidance is due to the promotional activity?

Mike, look, I'll take the tariff piece, and then I'll turn back to Keith in terms of the EBITDA outlook. So I think when we last reported back in June, you'll remember the reciprocal rate for many of the key countries that we store from such as Vietnam, Malaysia, Indonesia, we're actually sitting at 10%. And then more recently, they actually pretty much doubled, with most of them at [ 20 or 19 ]. So I think that has stepped up from when we last reported. So that's built in to the guidance that obviously Keith shared through. And in the meantime, we just continue to work on moving more products out of China, which have the heaviest weight of tariffs, and the team have done a good job on that. Some things are a little bit slower to move out such as some of the technology and a few custom fabrics. So it's just put a bit more weighting for us.

But Keith, I'll turn to you for Mike's question on the EBITDA outlook.

Yes. Thanks, Mary. And thanks, Mike. It really is a gross margin topic, Mike, as you're aware. I think the -- as you could see through the other line items, I think we're doing a great job managing the controllable expenses, leveraging and gaining efficiencies in marketing. So let's talk a little bit more about that gross margin piece. And also as you look to the year-over-year deltas in the fourth quarter, we're closing that gap -- some where we anticipate closing that gap somewhat.

Let's talk about that for a second because the pressures are really twofold. It's sort of the perfect storm of the tariffs. And to be frank, the requirement that we increased the promotional discounts that we're offering, given the competitive backdrop, those -- the combination of those 2 things were more punitive to the model in the near term than we had expected last quarter when we gave you the guidance.

So let's talk about the fourth quarter step-up for a second there in terms of the year-over-year delta. Look, it's important to note that the fourth quarter lap for us, from a gross margin perspective, is easier than it was in either the second or third quarter. That's because last year's fourth quarter saw a meaningful step-up in our effective discount level. We ramped promotions following that tough start to the holiday selling season. This is the largest single driver of the improved year-over-year delta in Q4 as it compares to Q2 and Q3.

The other piece of this is partially tied also not only just to the change that Mary mentioned in the effective tariffs on a few of the countries, but it has to do with our exposure to China-sourced goods. It's going to be lower. We anticipate it's going to be lower in Q4 than what Q3 or Q2, and that lessens the tariff burden on the P&L, but the price increases we took in Q3 actually remain consistent.

So here's 2 things that kind of happened. First, it's been harder to get custom and StealthTech manufacturing out of China than we originally anticipated. We've made great progress. We have good visibility into it now, but it did take a little longer than we thought last quarter.

And the second piece of this is a little bit of what we anticipated from the China sourcing to hit into 2Q moved into 3Q, which concentrates that effect. It's substantially higher as a percentage of net sales in Q3 than it is in Q4 or Q2. And again, that was a little bit on the timing related to our prior guidance. These are -- they're very unusual and exogenous factors that we're dealing with here. But as Shawn, mentioned earlier, and as I mentioned as well, we've got quite a few plans in place to get us back to those [indiscernible], let's call it, like long-term levels over time that we've discussed in the past.

Okay. If I can ask one question of -- Shawn, Shawn, I think you had said new -- maybe -- I don't know if you specifically called the new room, but it sounded like a big new launch, new room potentially, you said at least a year away. That sounds like the end of calendar 2026. Is that -- I thought it was going to be sort of earlier in 2026, maybe I misinterpreted that. But is that new launch, new room that you have teased, is that being pushed out at all?

No. I mean, it's a general comment about these big changes coming in the future. I will say, the idea that it would come early in calendar '26 is not realistic. I think that we do have actually a lot of action between here and the new room, if you can believe that. We have a lot of really exciting things to be announcing over the next few quarters.

But as it turns -- as we -- let me put it this way, as we look at advancing into the next room, we've been very clear that, that's coming. We will be entering that realm in a fulsome way that I think is going to be really exciting and pretty game changing for the brand, and it's not going to be a trickle. And so we still got a little bit of time between here and there. I think that's a decent breadcrumb. But in the meantime, we also have a lot of really exciting products to launch in the living space that you're familiar with. So good call out.

Got it. Okay. One more, if I could. Any change -- I mean, I presume not even talked about it, but any change in that sort of long-term outlook that you guys talked about at your Analyst Day, which, again, requires a pretty big ramp in terms of growth beyond 2025. So the 2025 a little bit of off year and then growth in calendar 2026 and 2027 and beyond a much greater ramp. Is that still the idea?

Yes, Mike. That's still the idea. Look, this year with all the tariff stuff has been a little bit of a wonky year relative to that plan. Obviously, there was no way to include that into that algorithm. And we're managing through it, and I think we've got good plans to get through it and then get back on track.

Yes. So there's always going to be a couple of little things like that. What's interesting, when you're at the margin levels, we are at particularly at the bottom. Little delta and basis points can make a big difference at the bottom line EPS, but that's the opportunity here, too. And we get through this tariff stuff, we get back on the algorithm, there's tremendous upside at the bottom line with very small changes in basis points and flow-through from the top line. So nothing fundamentally has changed on that, a little bit of noise this year because of the distractions, but we still feel great about the long term.

Our next question comes from the line of Eric Des Lauriers with Craig-Hallum Capital Group.

I appreciate the commentary you provided on sort of the puts and takes on the EBITDA revision. It certainly sounds like it's mostly a gross margin issue here. Could you expand on the levers you have to pull on expanding gross margins sort of midway through Q4 and into next year? It sounds like you're pretty confident on your ability to do that and would love to just get some more color if you have it.

For a number of years, Lovesac reported gross margins in the low to mid-50s range. However, over the last couple of years, we completely rebuilt the inbound logistics program. We implemented automated systems. We found other efficiencies in operating procedures. In effect, we structurally reset gross margins to the high 50s, near 60 level, right? And that's kind of what we were discussing at our Investor Day last year.

While our latest full year guidance for this year reflects a range of 57 to 58 -- so still high in a historical context. It is below the high 50s, near 60 level, we have identified measures to get us back on that path just like you talked about. So here's 5 I'll give you that we think can help.

First, the outbound logistics opportunities still remain for us. We've made it through most of the inbound pieces, but now we can optimize warehousing, we can optimize last-mile shipping, test for these things are in the works, and they're underway. That's number one.

Number two, we continue to work on realignment of our countries of origin to minimize tariff and other costs. That's a much bigger conversation we're happy to get into. We are not done with that effort. There's a lot of opportunity still to work there, some of which will take a couple of years to put in place. But that's a big part of this, and we're actively pursuing those levers.

Number three, we're going to implement new optional delivery service levels for payment. We also have new return policies and other things that can help us mitigate some of the gross margin pressures.

Number four, as part of this brand evolution product hierarchy work that Shawn and Mary have talked about, we're going to evolve our promotion strategy. Moving away, and as Mary said, from sort of a broad-based, everything is included promotion, and more toward a variable strategy across products and channels, right? We're -- this will be coming soon. And I think what that will do is help us in reducing aggregate discount levels, which puts pressure on the gross margin. And it's a big part of that change in EBITDA that I talked about a little while ago for this year.

Look at the last -- definitely not the least piece of this is, hopefully, when we come out of this category decline and get back to growth or normalization even, the competitive promotional environment settles in and take some of the pressure off the big tentpole moment. So like all of these things, we've got good visibility into action plans that we're going to be putting into place. So hopefully, that gives you some color.

Yes. No, that was very clear and helpful here. One kind of follow-up here. You cited the product hierarchy, just in that answer there, come up a couple of times previously in this call. Just to make sure I understand that here. Is that sort of the differences between the Sactional and the Snugg. Now, for example, one is sort of a more complex hands-on, requires a lot of demos. The other is more simple and perhaps easier to sell online kind of thing. Is that what you're referring to by product hierarchy? Or is there other aspects of it that I might be missing?

That is a, I guess, front-end outcome of the product hierarchy. We haven't revealed and discuss like this overall product hierarchy that I'm kind of talking about, but it's a good representation of that kind of thinking, and it's been evolving in real time. We came up with the EverCouch invention and approach to building beautiful, super comfortable sofas, arm chairs, loveseats in a smaller package. A while back as we've picked up the product or whatnot, as the brand has been evolving, we've been going to this brand evo work with the outside agency. So as all of this has kind of converged, which manifested itself for instance, in the name change to Snugg, which is a better name for that product line and it fits within this product hierarchy you're alluding to, you get that outcome.

But the -- so we'll have more to share perhaps even next quarter about this brand evo work, what it implicates for the brand, the product hierarchy, et cetera. Again, you're going to see us already living with it in real time as we launch Snugg, you'll see this change in tone in the advertising and our approach to marketing in general. And it's just a really, really exciting time for Lovesac. And frankly, I think it sets us up well further out for these bigger changes that are to come.

But in the meantime, as I said, just a few minutes ago, we -- given this new point of view on products for new channels products for the Internet especially, that just don't require so much handholding, you're going to see a lot of action for Lovesac over the next number of quarters that we can be really excited about.

Great. I appreciate that color there, and we'll look forward to that. Last one for me here. Just on the overall sort of marketing shift here. EverCouch to Snugg, it sounds like there'll be some more overall Lovesac fully brand-wide refreshments here. I'm just wondering, how long this has been in the works? It seems like the switch from EverCouch to Snugg is somewhat more recently. I'm wondering if there's any sort of increase in marketing expenses that you're expecting over the next quarters or years here to kind of support this? And I guess just a bit more color overall on some of the timing around this brand refresh and the overall strategy behind it?

Yes, nothing meaningful in terms of marketing expense. In fact, we should become more efficient with our marketing. You'll see a lot of tactical changes, right? Like historically, you've seen Lovesac on linear TV, it was a formula that worked really well for us. I think you'll see a pretty meaningful shift to digital. So it will be a shift in dollars spend and whatnot.

But nothing -- we're not thinking about increases. We feel really good about our marketing spend levels. You can see us controlling our SG&A. And the good news is, is that we've made this investment already. This brand refresh is now almost complete. And we've been absorbing those kind of hard costs with the agencies and everything required to do this all along the way, and this is something I'm super proud of at Lovesac.

As we've said a number of times, the past 3 years have been brutal to the home category. It's been a really tough time overall. And I think Lovesac's weathered it well, not just hunkering down, we are controlling SG&A and whatnot, that's pretty obvious. But we've been investing, and this is just one of -- one of the many investments that we've made and you -- so you're going to see the fruits of those labors unfold in real time all the way through holiday season this year, well into next year. And like I said, a continued launch cadence of new products that -- you nailed it, that are really appropriate for online sales especially, and new representation in the execution of those advertisements and everything else.

Our next question comes from the line of Thomas Forte with Maxim Group.

Great, Shawn. One question and one follow-up from me. So Shawn, as you know, I cover Apple and I've had to think about the prospect of an [ iPhone ] made in the U.S.A. So how should investors think about the potential for Lovesac made in the U.S.A.?

Yes. For anyone following close enough, this is a passion point for me. It has been for years. I'm sorry that we haven't delivered it sooner, but we have not stood still. And the answer is we are running this down really hard for every obvious reason.

But back to first principles, look, this is a brand that promotes sameness in a way that no other brand does, in a way that's good for consumers, right? You buy into a Sactionals platform or even EverCouch. You'll be able to upgrade it, change it even in, I don't know, swap out the arms with the same fabric that you bought maybe 4 or 5 years ago, that will still match because that's the way -- not only we build the product on a component basis, but we try not to drop our fabric so that you can do what I just described.

That said, you're buying into a platform that demands us to maintain sameness. These same basic SKUs, the components that make up our Designed for Life lever products, should be made closer to consumers, delivered over shorter distances more sustainably and more readily. And that's exactly what we're chasing down on a first principles basis, and we're closer to it than ever.

So not ready to make any announcements yet, but I'm very confident that a significant portion of our manufacturing will be moving domestic over the next number of quarters even. And like any big shift, that will require a lot of -- it will require a solving in. It won't be overnight, but it's within our graph, and I think we have a better path to that than almost anyone in our business because of the component basis of how we approach these inventions. It really gives us a lot of economies of scale that others may not have. So we're excited about those prospects.

Great. And then for my follow-up, I was hoping for an update on your e-commerce efforts. It seems like that could be a great way for you to provide extra value to consumers at a time they may be looking for it and then also a way to mitigate the impact of tariffs.

Yes. No, thank you, Tom. It's a great question. And yes, we are thrilled, as you remember we announced back in quarter 1 about launching Loved by Lovesac, which is our retail platform. And initially, we went live in one state in Texas. We've now added 5 more states, and you're going to see a lot more states being added. And you're absolutely right, I think it helps build our value proposition because it really shows that you can have this product for the rest of your life if you choose to. And then if you change your mind, you want different covers because you just want a different aesthetic, then we will be able to build out that trading element that we've also talked about. We're doing a pilot at the end of this year and then we'll have that really rolled out next year.

And I think we've always talked about activating the right size of our flywheel, enabling that customer lifetime value, and it's a huge advantage for us. No one else can do it. It's something that we can do very profitably and effectively, but then also build that loyalty for our customers. So just very excited to start to see that building and look forward to sharing more as we continue to expand the state. So thank you for the question, Tom.

Our next question comes from the line of Matt Koranda with ROTH Capital Partners.

Just wanted to touch on the progression of the quarter. You mentioned the category improved, I think, across the quarter, and sustained into July and perhaps into August. But did you see a pickup that was kind of commensurate with that in your own comp performance during the quarter? And how have you tracked sort of relative to the category quarter-to-date?

Yes. No, thank you, Matt, for the question. So I think quarter-to-date, we feel really good in terms of our underlying performance obviously, having got through Labor Day event, that's obviously a very key tempo moment for this quarter. And all of that is baked into our guidance and demonstrates us continuing to gain share, because whilst Shawn talked about at the beginning, the category showed a little bit more improvement. It's still down. And as we've shown with our results, we continue to gain that market share. We still see it being promotional.

And I think you're always very close to tracking us and seeing what's happening in the category, and it's just not stepping down from those holiday peaks, which is why Keith talked about that promotional pressure. So for us, it's really how do we continue to plan knowing that the macros are still challenging. Customers are still a little bit more reserved around big purchases. So the tactics around personalized offers and really driving them into the showroom is so important.

But what's also really positive for us is we're not seeing any trade down. So Lovesoft is actually at its highest level of penetration that we've seen for a long time, and you know that's a premium fill choice. Recliner is the best innovation that we have launched, and it's being factored into so many customers purchase with us. So we just see a lot of opportunity when we give them great product even though there are those pressures that we can win. So we stay very close. We continue to test and learn through what continues to be challenging as Keith touched on the promotions, but very similar through the quarter and as we planned for the rest of the year.

Okay. Appreciate that, Mary. And then just curious, the customer response to some of the pricing actions you guys have taken on Sactionals especially in the last few months. Does the changed conversion from the quotation pipeline in any way are you seeing sort of responses where folks trade into the, I guess, now Snugg? What's the way to think about sort of the customer response to those pricing actions?

Yes. I mean I think the one I can really talk to because it's been a market for longer is we did a surgical price increase back in quarter 2. But we did see a very clear opportunity in terms of kind of our value prop and all our competitors have taken price for years and even at the beginning of this year. So we feel very, very good around where we're positioned. But certainly from that, we haven't seen any trade down, which I think kind of your question down to opening price point fabrics from some of the higher fabric choices and not seeing any shift from that increase in terms of the units that people are selecting. So I think that one, we feel very good on.

The second one, we just put in place, so it's very early days. So we're just going to keep a read on it. Customers, they expected increases because I think they [ hear ] out tariffs and price increases pretty much every day at the moment. And certainly, as our team, one of the key superpowers we have is around just the direct communication with our teams and really giving them great tools. The value proposition work we've just done actually made us feel even more confident about how great our product is and really, no one else comes close to it. So we've equipped them with even more tools to be able to tell that story and not seeing any resistance to date. But again, we've got to stay close to it. Certainly as the tariffs will put more pressure more broadly on the customer.

Okay. I appreciate that, Mary. And then maybe just for Keith, the gross margin progression, I know it's been covered a little bit, but I just want to make sure I understand it clearly. Third quarter, the headwind is really -- we're still not lapping the heavier promotions from last year. So we have the heavier promotion putting pressure on product margins and then heavier tariff pressure as well in the third quarter. But then that flipped to the positive or, I guess, flattish to positive gross margin that's implied in the guide comes from basically just lapping promos from last year? And maybe just help me understand that a little bit more.

Yes. So a couple of things there. Number one, generally speaking, you're right there, which is we didn't really step up the pace of promotional offers until the Q4 after the initial start for the Cyber 5 holiday came in below our expectations. That's when we dialed up the promotional intensity with gift with purchase, surgical offers that were available to our showroom folks to get conversion rates higher, all that kind of stuff. That started mid-Q4 last year. It had a meaningful effect on that quarter. So we still have a lower promotional intensity lap in Q3, which is a meaningful headwind that largely goes away in Q4. That's the biggest piece.

The second piece is, if you think about it from a tariff impact as a relationship to sales -- because I can't use dollars because the sales volumes are so different by quarter. But if you think about it from like a relationship to sales, it's several hundred basis points more impact in Q3 from China tariffs and others than it was in Q2, and that eases off quite a bit in Q4, not quite to the Q2 levels, but well below Q3. You put those 2 things together, and the midpoint of the range is really more like a flat growth sort of like a flattish gross margin year-over-year. If you think of it that way, we're not actually calling for expansion in gross margins in Q4 year-over-year. But those 2 pieces actually give you the vast majority of the answer right there.

Our final question this morning comes from the line of Brian Nagel with Oppenheimer & Company.

This is Andrew Chasanoff on for Brian. Just a few quick ones. In terms of just gross margin, how are you guys thinking about what the unmitigated tariff costs for [ Love ] is right now? And does your guidance contemplate any further pricing actions in addition to what you already discussed?

I'm not sure about the first part of the question. We are not building in any incremental changes to the tariff regimes right now. So for example, press that's been in place about additional considerations for furniture is a category that is not factored into the guide. So we are using the current in effect tariff rates as the basis for our outlook. There are many plans we have in places that discussed that are going to -- some of which take a little bit longer to put in place to get the gross margins back to the target levels as I've explained earlier. And look, if the tariff regime changes again, all those plans will change again, not just for us but for competitors as well.

So look, we -- as I said, we have lots of things we're working on in the background to improve the gross margins. We're not counting on those for the guide that you see in Q4, right? That's more of a long-term several quarters get us back their play. But we'll continue to react accordingly as well most of the peer group. And if there is anything, either materially negative or favorable that comes out of this, we're ready to adapt.

Awesome. And then I guess just to follow up quickly on the expense side. I understand that you discussed kind of the marketing in detail. But is there any reason to think that the expense profile of the business is changing as we go into back half '25 and into '26?

No, nothing material. The only thing I would point out to remind everybody is in Q4 of last year, we had an unwind of incentive compensation given the weaker-than-expected performance within the Q4. So this year, as we've said all year, we expect to have higher SG&A as a percentage of sales in Q4 than we did in Q4 of last year because, again, as we've been planning, we're not planning for an unwind of previously accrued incentive compensation like we saw last year. So that's the only thing to call out. You'll see that when you back into what Q4 guidance is, which you can get to pretty cleanly from the full year minus the Q3. It is a higher SG&A in Q4, but that's the reason why there's nothing else.

More structurally, as the growth continue to hopefully pick up and we get some category support, that, in effect, will drive same-store omnichannel comparable sales for us, which has far greater flow-through than some of the other pieces. So look, again, if the category bounces back, you get a big acceleration and step-up in the amount of top line that flows through to the bottom line. So that's what we're hoping for. We're not counting on it, but we'll take it.

This concludes our question-and-answer session. I'll turn the floor back to Mr. Nelson for any final comments.

Just a big thank you to the investors that support Lovesac and our pursuit of building the most loved home brand in America, and to all those [ Sackers ] out there that have made this company so great. Onto a bright future. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Greetings. Welcome to Lovesac's First Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. At this time, I'll turn the conference over to Caitlin Churchill, Investor Relations for Lovesac. Kaitlin, 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 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'd like to turn the call over to Shawn Nelson, Chief Executive Officer of the Lovesac Company. Shwan?

Good morning, everyone, and thank you for joining us. I'll start by sharing a high-level overview of our first quarter results provide an update on our Design 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 Q2 and FY '26 outlook. .

Turning to our first quarter. Overall, we are pleased to have delivered results in line with our expectations and consistent with our plan to capitalize on secular initiatives and return to growth. For the first quarter, total net sales were $138.4 million, reflecting a year-over-year increase of 4.3%. These results reflect market share gains despite the ongoing headwinds facing this category, which we estimate declined 5% for the comparable period.

Total omnichannel comparable net sales increased 2.8% for the quarter with additional growth coming from new and non-comp touch point contributions. Notably, our results reflect not only top line growth but also SG&A leverage as we've begun to reap the benefits of previous investments aimed to bolster core capabilities and accelerate our pace of product innovation. As a result, adjusted EBITDA, net loss and net loss per common share all improved by double-digit percentages year-over-year.

Our balance sheet also remains very healthy with inventory levels and net cash providing substantial flexibility to weather tariff distractions, accelerate growth and enhance returns on capital.

Now for the exciting part, innovation on our Design for Life product platforms. First, with a full quarter of a Reclining Seat in market, we can say that it has been a huge success. Backed by the launch of the recline of Civilization marketing campaign mid-quarter, we've seen increases in new customer attachment coupled with healthy units per transaction, all while maintaining the strong repeat customer purchases we spoke of last quarter. Our customers love the recliner and see it as a tremendous value compared to competitor offerings, giving us optimism for continued meaningful contributions for many years to come.

Second, the EverCouch, our first new product platform in over a decade, this elegant and sophisticated entry into the Arm Chair, Love Seat and Sofa category effectively doubles Lovesac's total addressable market. EverCouch is a true design for life product platform constructed to the highest standards out of the best materials. We believe that it is the best couch on the market period. EverCouch provides a solution for customers whose needs differ from those of a Sactionals customer, deemphasizing modularity, but with more of a focus on style, comfort, maintainability and ease of use. It has a lower price point as a result of this engineering.

EverCouch is beautiful with watchful covers, exchangeable arm styles, rapid shipping capabilities and easy assembly with no tools, of course. Even better is that it leverages Lovesac's established brand equity in couches and Comfort seating. Well, after a 6-week test and learn campaign in suburban Boston, we officially launched EverCouch on lovesac.com and in 27 showrooms on May 7. Initial feedback has been very positive, and our showroom team members are excited. We have not yet turned on the marketing engine since we are refining the sales training based on our learnings as well as building inventories to support a broader sales push, but it is selling, and we are proud of this a new invention from Lovesac.

Marketing, expansion into additional showrooms and potentially select use of partner channels are all in the works to bolster awareness and appreciation for this exciting new platform from Lovesac. While we tend to focus on the larger product launches, rest assured, we expect to have incremental enhancements to existing products on an ongoing basis as well. For example, as we reach the anniversary of the launch of our wildly successful Pillowsac chair in May, we added new wood frame colors, including a darker brown and a gorgeous black. These additions came out of consumer insights and data collected from our current and potential customers. It's a perfect example of how we let research and data inform our innovation to increase our hit rate for success.

There is plenty more to come along these lines this year and ongoing. Last but not least, we're making excellent progress on our additional product platforms planned for launch over the coming years, including new rooms of the house beginning in fiscal 2027, which is calendar 2026, by the way. Expansion of our addressable markets and expansion of our brand, this should deepen the relationship that we have with our customers and drive expansion of our business and value creation. We're not quite ready to share all the details yet, but stay tuned. Trust me, we are working on some really exciting stuff.

We get a lot of questions about the consumer, including monthly or even weekly trends to try to glean some insight into a fundamental change in trend. It's only been 2 months since our last earnings call. And honestly, it's too early to make a clear call on any trend change from the data that we're seeing today. The category got a little better in March, weakened a little in April, and the quarter ended right up in line with the average trend since the fall, which is down mid-single digits. That remains our baseline planning for now, but we'll update you when things become more clear.

What I can say is that we remain focused on what we can control. Just like I said earlier, we aim to leverage our secular growth initiatives to drive growth here at Lovesac. We grew in the fiscal first quarter, and as Keith will detail later, we forecast growth for the fiscal second quarter and for the full year, even without the category supporting us. As for tariffs, we are actively working to mitigate the potential impact, and we believe we can leverage all of the available tools at our disposal to manage that impact. Mary will provide more details momentarily.

But given our unique model with high product margins, geographic redundancy and strong vendor relationships, we believe we can cover the impact within our existing full year guidance, barring any new wildcard scenarios, of course. In summary, we are committed to delivering on our objectives, leveraging Lovesac's innovative product offerings, strong customer relationships, and operational excellence to grow irrespective of the category in the near term while maintaining clarity around long-term thinking and value creation.

But let me be clear. We believe that when the replacement cycle for Comfort seating ramps up and housing turnover reaccelerates, we will be ready to capitalize on it immediately. We are thrilled to have our new Chief Marketing Officer, Heidi Cooley, now on board. Heidi is already working closely with our teams, developing plans to support our ambition to be the most loved home brand in America by 2030 while driving profitable sales growth simultaneously. We look forward to sharing more in the future.

Finally, I must thank our entire Lovesac's family for their adaptability their creativity and commitment to this mission. Launching new product platforms requires extra effort from every single team member from our touch points to HQ, and that's in addition to navigating tariff uncertainty and a challenging category to say the least. Every one of you is essential. You're reshaping the home category with products that are designed for life and thereby creating long-term value for all stakeholders.

With that, I'll hand it over to Mary to cover our strategic priorities and progress in more detail. Mary?

Thank you, Sean, and good morning, everyone. I'll now focus on our second super power, our customer acquisition engines that are uniquely tailored to each of our design for life platforms as well as our growth enablers, including our advantaged supply chain. Beginning with customer acquisition engines, our super power really lies in our ability to leverage different mixes of brand and performance marketing, digital configuration through lovesac.com, incredible showroom experiences and efficient partnerships to optimally affect 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. Before I dive into each of these components, I'd like to start by highlighting first quarter growth as an example of the advantage Lovesac derived from our unique mix of customer acquisition engine options.

We were pleased to see the return to growth in the business throughout quarter 1, with strong quote conversion in our showrooms in particular. We made a conscious decision to lean into our showrooms marginally at the expense of our Internet business for 2 reasons: first, we leverage the strength of our product demos to drive appreciation for new innovations such as the recliner; second, similar to the end of the fourth quarter, we were able to combat aggressive discounting by competitors through the continued effectiveness of highly relevant personalized offers.

We continually refine our mix, letting data drivers towards optimal performance. And with that backdrop, let's spend a few moments on each of the components, starting with brand and performance marketing.

As Shawn shared, we have tremendous momentum with one of our newest innovations, the reclining seat supported by a recliner civilization campaign in quarter 1. It was developed to be a social campaign, leveraging influencers and content creators to create a cultural moment to exponentially grow new customer awareness and it worked. The campaign generated [ 5 billion ] earned impressions and over 600% increase in engagement across all digital channels and almost 700 PR articles.

In quarter 1, we also adjusted our marketing allocations, enhancing our top-of-funnel awareness program, especially through search and social media to balance that with mid- and lower funnel conversion tactics. This also worked having produced a strong 25% increase in traffic to the website as customers start their discovery about our products, an investment we believe will pay off over time as that awareness matures. We'll continue to test and learn throughout the funnel and in particular, on new awareness tactics as we concentrate on building the Lovesac brand and introducing new innovations.

Building on the first quarter's momentum with new customers. In quarter 2, we launched our latest television commercial featuring our Recliner in Action. Beyond the watch for more of these cultural moments in the upcoming months of PillowSac Accent Chair, StealthTech and our newly launched platform EverCouch to name just a few. CTV also continues to be a strong lever that we plan to optimize over the course of the year with efficiencies in linear TV offsetting some of the inflationary pressure in search.

Second is our digital configurations and how we bring Lovesac to life online as we continue to invest in optimizing the digital experience, both in technology and improving the customer journey, we're seeing return on our investments at all phases of our flywheel. Our replatforming to Adobe Edge has helped us improve our SEO, bringing qualified visitors to the website and allowing us to reinvest marketing spend with organic search visits to the website growing almost 40% year-over-year in quarter 1.

Our customer reengagement center, MyHub is being progressively improved, always with the goal of being a frictionless omnichannel experience for new and repeat purchases. In quarter 1, repeat purchases an increase of 20% to last year with over 40% more customers accessing their accounts. Perhaps more importantly, these platform investments enable us to launch new products and platforms effectively. And I don't mean only under the skin, but rather customer-facing.

EverCouch was the impetus for the newly designed homepage and the updated website navigation. As of May, customers can now more quickly and intuitively find the categories and specific products they're looking for. with a distinction between sectional, couches and shares. Early indicators show a more engaged customer converting at a higher rate with improved customer satisfaction overall. And we will learn more as we ramp up investments in the customer acquisition engine throughout this year, including our formal EverCouch marketing campaign launched in the second half of this year.

Third is our showroom experience, the physical brand amplifiers of our Design for Life products, the linchpin of our omnichannel model with the product platforms conveniently accessible in real life. Just a few weeks ago, we evolved our product demo to accommodate the EverCouch. This continued evolution of our signature selling process allows our customers to experience all of the features and benefits of our product platform and drive the conversion improvement as I shared earlier. Shawn and I spent a lot of time in the field listening to our teams, and we were just together in the field fine-tuning the demo to incorporate all the great feedback from our soft launch.

While any showroom can sell EverCouch already, we plan to scale physical inclusion of an EverCouch product to approximately 100 showrooms later this summer, allowing every major DMA to showcases platform. I'd also like to highlight a recently launched update to our performance-based compensation model for our field teams now inclusive of a blend of individualized metrics in addition to the long-standing company-wide metrics. We're already seeing benefits coming through in quarter 1, and it was just great to see how motivated our teams are to drive their business and the brand potential.

Finally, complementing our showrooms is our partnership model, including Costco and [indiscernible]. We recently completed a detailed strategic planning review that considered the optimization of our customer acquisition engine options. Coming out of this review, we made the decision to end our [indiscernible] partnership after 5 successful years together. When we began this partnership in 2020, Lovesac had less than 100 showrooms across the country and Best Buy helped us to quickly expand distribution points and establish credibility in home audio and tech, all while we also help to reinforce their leadership in tech-enabled product categories.

Fast forward 5 years, and our showroom footprint has tripled, providing convenient accessibility for our current and future customers to experience Lovesac and StealthTech. We have immense confidence in our ability to provide an excellent customer experience and deliver more profitable growth through our owned digital and showroom ecosystem as well as with our Costco partnership.

In conjunction with our decision, we estimate booking a nonrecurring charge of approximately $2 million in the second quarter, partially offset by improved profitability in the second half. And regarding Costco, it represents the sizable share of our partnership model with Costco's more than 120 million members and strong traffic our roadshow model allows us to activate pop-ups in its clubs while owning 100% of the customer data and relationships.

We'll continue to expand our assortment with Costco this year, and we plan a 15% increase in road shows over last year, further demonstrating our unique ability to sell premium products in approximately 100 square feet. When combined, these 4 elements of our customer acquisition engines create an unmatched customer experience that drives brand love. We're going to reinforce our brand experience and customer satisfaction further by launching customer-facing services, and we are excited to share that Lovesac, our new resale platform is officially live in Texas. This first state launch marks a significant step in our long-term commitment to sustainability, the circularity and innovation in home furnishings. By giving pre-lube products to second life, we're not just reducing waste, we are reinforcing our promise to design products that are built to last designed to evolve and be loved again.

This is also a critical foundation for us to launch trade-in services, which we are planning for later this year, which will help unlock both trade in and trade up for our new and loyal customers. And this represents an important milestone in our journey towards a more responsible and resilient future for Lovesac. And key to us sustaining all of this profitable growth over the long term are our growth enablers. And I'll just briefly mention our supply chain, a critical component of our financial success and one built for scalability in advance of new product and platform introductions.

Over the past few years, we have transformed our network strategy and carrier model including implementation of both transportation and order management systems. We are now well underway with our work on optimizing our warehouse and outbound logistics programs consistent with what we've shared previously.

Regarding tariffs, as we mentioned back in April, we have 4 key levers to help mitigate our exposure, and we have made significant progress on each. The first is focused on working with our long-term vendors for concessions, and we have received work from every key vendor. The second is the work to further diversify manufacturing away from China. We remain on track to be about 13% for the full fiscal year, but with an exit rate substantially lower than that. Third, given the strength of our brand and the fact that our last price increase was a narrow one in 2023, we executed some surgical and strategic price increases last month and are pleased with the performance since being implemented.

We feel very good about our value proposition as many other brands have taken multiple increases in the past 2 years. And the final initiative was looking at other cost efficiencies and the teams have continued to drive this work. We're currently leveraging all of these levers at differing degrees with flexibility to refine them further, depending on the final outcomes of tariff implementations. Combined with the flexibility gained by building higher-than-normal inventory ahead of this potential, we feel that our 4-pronged approach should mitigate the majority of the current tariff pressure.

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 first quarter, followed by our outlook for the rest of fiscal '26. As we begin with performance metrics, please note that all references to the first quarter refer to fiscal '26 unless otherwise noted. Net sales increased $5.8 million or 4.3% to $138.4 million in the first quarter compared to the prior year period. Showroom net sales increased $14.9 million or 18.2% from $96.5 million in the first quarter compared to the prior year period, driven by an increase of 2.8% in omnichannel comparable net sales and the net addition of 21 new showrooms. .

Internet net sales decreased $3.3 million or 8.9% to $33.3 million in the first quarter compared to the prior year period. Other net sales, which include pop-up shop, shop-in-shop and open-box inventory transactions decreased $5.8 million or 40.5% to $8.6 million in the first quarter compared to the prior year period. The decrease was primarily attributable to the company's decision not to engage in any BARDA transactions during the current period.

By product category in the first quarter, our Sactional net sales increased 4.5%, Sacs net sales increased 6.4%, and our other net sales, which includes decorative pillows, blankets and accessories decreased 17.1% over the prior year period. Gross margin decreased 60 basis points to 53.7% of net sales in the first quarter of fiscal '26 versus 54.3% in the prior year period, primarily driven by a decrease of 230 basis points in product margin driven by higher promotional discounting, partially offset by decreases of 130 basis points in inbound transportation costs and 40 basis points in outbound transportation and warehousing costs.

SG&A expense as a percent of net sales was 48.5% in the first quarter of fiscal '26 versus 51.6% in the prior year period. The decreased percentage is primarily related to lower professional fees, credit card fees, computer expense and other overhead costs and higher net sales. The decrease in selling, general and administrative expense dollars was primarily related to decreases of $3.8 million in professional fees and insurance matters, $0.9 million in credit card fees, $0.7 million in computer expense and $0.3 million in other overhead costs, partially offset by increases of $2.2 million in payroll, $1.3 million in equity-based compensation and $0.9 million in rent.

Rent increased $0.9 million related to $1 million of increase in rent expense from our net addition of 21 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 $0.6 million in the first quarter. Advertising and marketing expenses increased $0.6 million or 3.3% to $18.6 million for the first quarter compared to the prior year period. Advertising and marketing expenses remained relatively flat at 13.4% of net sales in the first quarter as compared to 13.6% of net sales in the prior year period.

Operating loss for the quarter was $15 million compared to $17.9 million in the first quarter of last year, driven by the factors we just discussed. Before we turn our attention to net loss, net loss per common share and adjusted EBITDA, please refer to the terminology and reconciliation between each of our adjusted metrics in their most directly comparable GAAP measurements in our earnings release issued earlier this morning.

Net loss for the quarter was $10.8 million or negative $0.73 per common share compared to a net loss of $13 million or negative $0.83 per common share in the prior year period. During the first quarter, we recorded an income tax benefit of $3.8 million as compared to $4.2 million in the prior year period. Adjusted EBITDA loss for the quarter was $8.4 million as compared to $10.3 million in the prior year period.

Turning to our balance sheet. We ended the first 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 $26.9 million in cash and cash equivalents while retaining $36 million in committed availability with no borrowings on our recently amended credit facility.

First, our total merchandise inventory levels are in line with our projections, somewhat higher than necessary given our intentional build ahead of tariff uncertainty. We expect to begin reducing excess inventory levels in the second quarter, which we estimate will help offset working capital requirements for building EverCouch weeks of stock through the second half of the fiscal year. 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.

Second, consistent with our strategy to allocate excess capital opportunistically with a focus on long-term value creation and enhancing returns on capital, during the quarter, we repurchased approximately 306,000 shares of our common stock at an average price of $19.57 for approximately $6 million. This leaves approximately $14.1 million remaining under our existing share repurchase authorization. Please refer to our earnings press release for other details on our first quarter financial performance.

So now for our outlook. As Shawn mentioned, while there is weekly and monthly variations, such as a better March, better week or April, the underlying category trends generally seem to revert towards negative mid-single digits on average for the last 7 or 8 months. As such, we're prudently maintaining our assumption and our plans for a 5% full year category decline. Additionally, we have many secular tailwinds helping counter that category outlook and providing optimism. These range from annualization of fiscal '25 major product launches, our recent launch of EverCouch, a reboot of our marketing strategies under new leadership, growth in physical showrooms, new tools for relationship management and more.

For the full year fiscal 2016, we are reaffirming our guidance. Please note that as Mary outlined, we have many arrows in our quiver with respect to managing tariff impacts. We're actively pursuing some combination of all of those 4 options that she outlined, and we believe we can manage tariff impacts within the full year ranges. That said, the exact amount of each mitigation option we deploy will depend on the ultimate specific tariffs implemented.

So as you think about the full year guidance, there is potential for an upward bias to net sales and a downward bias to gross margin getting us to the same adjusted EBITDA, net income and diluted EPS levels, again, depending on the ultimate tariff outcomes. Please also note that both our full year and second quarter guidance metrics include the impact of the write-off associated with the ending of the relationship with Best Buy which we currently estimate to be approximately $2 million pretax.

This nonrecurring onetime expense increases SG&A and reduces net income and EPS, though it does not impact adjusted EBITDA in our guidance given its nonrecurring nature. Specifically for the full year, we estimate net sales of $700 million to $750 million. We expect adjusted EBITDA between $48 million and $60 million. This includes gross margins of approximately 59%, advertising and marketing of approximately 12.5% as a percent of net sales and SG&A of approximately 41% as a percent of net sales.

We estimate net income to be between $13 million and $22 million. We estimate diluted income per common share in the range of $0.80 to $1.36 and approximately 16.3 million estimated diluted weighted average shares outstanding. For the fiscal second quarter, we estimate net sales of $157 million to $166 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 loss between $2 million and $7 million. This includes gross margins of approximately 55% to 56%, advertising and marketing of approximately 15% as a percent of net sales and SG&A of approximately 47% as a percent of net sales.

We estimate net loss to be $8 million to $12 million. We estimate basic loss per common share to be $0.58 to $0.83 with 14.6 million weighted average shares outstanding. In summary, stabilization of the category and an eventual return to category growth are ahead of us, even if that timing remains unclear at the moment. While in this category fog, we are 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 are building the Lovesac brand, investing in new product innovation that spans style, function and new categories to support a powerful multiyear secular growth outlook with macro upside exposure as icing on the cake.

With that, over to you, operator.

[Operator Instructions]

And our first question today is from the line of Michael Baker with D.A. Davidson.

Okay. I wanted to ask about the promotional environment. You referred to gross margins being a little bit less than expected because of what you're seeing promotionally. So if you could talk about what you're seeing from competitors? And if I -- correct me if I'm wrong, but I think the gross margin was lower than expected in the first quarter relative to the guidance you gave last quarter, yet you've maintained the full year gross margin outlook. So what is, I guess, better or what gets better later in the year in the gross margin such that you'll be in line?

Mike, it's Mary. I'll take the first part just around the promotional environment, and then I'll let Keith talk a little bit more on the gross margin. So I think very similar to what we had shared back in April. We still see discount levels for the category to be incredibly high. They still didn't come down from the peak and they're up year-over-year by at least kind of 400 basis points. .

We are seeing many competitors at kind of 40%, 45%. And I think as we've always said in the past, as long as we have a 3 in front of key promotions at the tempo moments, we see a lot of success. I think the second thing, as I shared, is that we're also getting a lot sharper around the personalized promotions that really allow us to understand kind of what's on our customers' lines, what they're looking to do, drive them to the showrooms so they get to do a demo. That way, we actually get to really unveil a lot more around the innovation we have and see quite a bit of trade up.

So we've planned for within the guidance that kind of continued competitive environment from a promotions point of view, and then I'll hand to Keith to talk a bit more about the gross margin.

Sure. And Mike, really what it boils down to is the timing of all those different levers that Mary and I talked about just a couple of minutes ago. So when you think about, for example, what our geographic reliance is on China, right? It starts off much higher than it ends the year averaging to the 13%. There have been -- long have been tariffs on China. So that piece mitigates.

Another one is vendor contributions. We've been working with them that started the year off with none. But as the tariff stuff has come into picture, we've worked to them on plans that develop through the year. Another one is pricing. So we've been doing a lot of work, as Mary mentioned, thinking through our relative pricing positioning within the market and ways that we could put ourselves into a proper position where the value proposition that we represent remains extremely strong and the value is really compelling to those customers. That plays out through the year and potentially even at greater levels depending on where those tariffs end up.

So when we think through what that total planning is, you get the costs associated with all of this stuff first before you get the benefit, which kind of folds into the mix over the course of the year. So there's a lot behind this that builds up to this, but we feel very good about that. And hopefully, that makes some sense.

It does. That does make sense. If I could ask one more, just if possible, any more color on EverCouch, which has been in stores for 5 weeks. I think the language you said is feedback has been very positive, but I'm wondering if you're willing to share anything on sales or anything surprising in terms of what the customers are telling you about that product?

Yes. It's too early -- this is Shawn. Too early to comment too much on sales other than we're really pleased with it, and our internal goals are being exceeded. We feel really good about the product. I think the main headline with it because it's only been a few weeks, and obviously, in sort of a test phase in only a few showrooms physically, is that the -- it's a whole new platform introduction. I know it seems like a strange thing for a company that's kind of famous for couches, crafty speaking. We actually only sell Sactionals heretofore.

And so to have this sofa love seat chair solution that operates very differently than Sactional which is, of course, the product we've been selling for a couple of decades and have it come in with 0 quality issues, no concerns on construction design because this is a platform we'll sell against for the next few decades as we do things at Lovesac.

So too early to share much color other than to say it's well received. It's absolutely selling in real time. It's a part of our product mix now. It's going to be for a long time. And we're really excited about how it changes the profile of what's offered in our showrooms. What I mean by that is when we do our own research. As you know, we're research -- we're a research-led organization as opposed to a merchandiser led organization. Style and comfort are the main table stakes for comfort seating. And Sactionals are fantastic, but obviously have their limitations in terms of what to offer to the customer in a style profile. So EverCouch radically changes that. And we're really pleased with the results. But we'll have a lot more data to share on the next call, I'm sure.

The next question is from the line of Maria Ripps with Canaccord Genuity.

First, could you maybe expand on your decision to exit your partnership with Best Buy? And does that mean that you'll be sort of relying more on cost cost to grow sort of your presence outside of your showrooms? And maybe more broadly, can you talk about your sort of broader approach to distribution partnerships now that you have sort of a much wider set of physical presence?

Yes, I'll start and Mary will chime in as well. We are really excited about new opportunities for new channels for Lovesac. And as we broaden our product offering, those opportunities are more available to us than ever and we are in partnership making moat. And so it's a really exciting time. The EverCouch especially opens up opportunities for us. given their logistical simplicity to Sactionals in many respects, even back through things like POS considerations, delivery considerations, et cetera. .

And we're really also excited to continue to expand the Costco relationship, both through new products as well as new sales opportunities. And so this will be -- the next year and beyond will be a time of testing and learning a great diversification, not just from a product perspective, but from a channel perspective for Lovesac.

Meanwhile, we are really grateful for the Best Buy partnership that we just wrapped up, and it was a fantastic way for us to get exposure at a time when we had very few showrooms. There's a fast path to more touch points and especially important to launch the StealthTech product in a way that really bought Lovesac a ton of credibility in the home audio space, StealthTech is a mainstay of our product offering and will become even more important as we branch into new categories and new rooms, as we've discussed.

And so we feel like we got everything we needed out of that relationship. At the same time, we have a great relationship with Best Buy and the team there and it's actually in our long history, our second foray in and out of Best Buy at times that were useful to both brands. And so life is long, and Lovesac meant to be here for decades. And so we look forward to continue to cultivate partnerships out there as they're useful the brand and our strategy.

Yes. I think, Maria, just to add, I think we're so clear and sharp in our plan. And I think with all the analysis we did, as you think back 5 years ago with 91 showrooms and we now tripled that number. It was just a really clear opportunity for us. You've got 80% of the Best Buy locations are within a 25-mile radius of our showrooms, and we're going to continue expanding the showrooms as we looked at both today and the future. It was very clear that for us to be able to really bring the brand to life, the new platform, obviously, with EverCouch really through our showrooms and the Costco partnership, it was really the best way for us both engaging with customers, but also from a profitability point of view because they are obviously expensive to staff and operate with lower volumes in our showroom.

So we have immense confidence. I think one of the big advantages is we do have all the data on our customers. So we're able to target any customers that are already bought at Best Buy for Lovesac. And obviously, that CRM engine will be very powerful for us as well as local targeting to let customers know in terms of where their nearest showroom is. And obviously, the website that we continue to get sharper and better, and we shared some of that earlier, just enables the omnichannel seamless experience in such a great way.

So I only think it's the confidence of our plan that actually made it very clear now is the right time to make that decision. And as Sean said, we're very grateful to Best Buy and feel very good about the plan going forward and particularly the partnership with Costco. They were just with us in the office just a week or so ago, really looking at our plans going forward in the future and really partnering together. So we feel good there.

Right. That's very helpful. And then secondly, sort of I just wanted to ask about sort of tariffs in China? And just sort of how does this recent agreement between the region sort of framework between the U.S. and China sort of influence the likelihood that you exit China altogether? And if you're still considering that, sort of what -- how should we think about possible sort of time line for that?

Yes. Look, we have a long and storied relationship with her manufacturers in Asia, China in particular, of course. There's no question that the current tariff -- the current tariff situation there is it's really not viable. And I think that is -- I read that -- I think that's the point of the tariff situation there, at least for consumer companies like ours. And so we're grateful to be already diversified out of China.

For us, we can see a path even in the nearest future to essentially manufacture nothing in China and get our get our manufacturing flow completely out of there. We've mostly done that in real time now. And so we have full redundancy and other geographies spread throughout Asia and now increasingly moving toward America. Our point of view is actually not even tariff driven. Our point of view at Lovesac just to remind those who come in and out of following us is to manufacture closer to the users of the product.

We want to be taking resources over shorter distances, turning them into finished product more sustainably and shipping back to customers over shorter distances. And so we're driven by that vision regardless of what happens with tariffs, and we are on a path to do exactly that. In fact, as we revamp even our current product line, as is happening behind the scenes and explore manufacturing to the lens that I just offered, we believe we have a path to more manufacturing closer to the consumer.

Meanwhile, we -- as I said, we can be completely out of China and feel very confident in our ability to maintain a continuous supply chain with no brakes or anything like that. And so in the near term, we have a few items that we're still manufacturing there just in a transition mode, but it's diminishing quickly towards 0.

Our next question is from the line of Brian Nagel with Oppenheimer.

First off, I mean recognizing in a very fluid environment. But as you talk about some of the initial successes with these new products, how should we -- to what extent is -- I guess you used the word upside, upside from these new products baked into the guidance for the balance of the fiscal year?

So I'll kick this one off. The point of our guidance in this particular, let's call it, cloudy macro period is to not overly burden any one particular item with some heroic assumption. Like I talked about in my remarks earlier, we have a lot of things working for us. And to be totally transparent, we can achieve the full year guidance with the core products basically being flat. We don't really need to see growth in the core products, and we can hit those levels.

So differently, if the new products do very well, we could even see declines in the core products. There's a lot of different ways we can get there. And that's an essential element to how we're running the business during this period and keeping ourselves in a position of strength, keeping the business healthy, living to fight another day. We are ready to go as soon as that housing turnover reaccelerate the replacement cycle picks up, all that stuff Shawn talked about. Our whole goal here is to be pragmatic and objective managers of this business, maintaining profitability, cash flow strength and growth, but retaining the upside for the macro as well. We are ready for all of that.

So it's a balanced approach. Many different scenarios can get us to the full year guidance across existing and new products? And if the macro picks up, hopefully, we all do even better.

Much helpful, Keith. I appreciate it. And then my second question, I guess, is a bigger picture, maybe more philosophical. But as we're thinking about tariffs, and I think, Barry, you mentioned maybe some price adjustments you've taken. How do you think about the price adjustments needed to potentially offset at least in part tariffs versus what remains a promotional backdrop within the space?

Yes. No, thank you, Brian. I think the first thing, we're always looking at all the levers. And I think what is clear to us is that people haven't stepped down in terms of on promotions. They're in the 40s, 50s, 60s. We're seeing top sellers going into clearance and then coming back out again. So we know we must have that 3 in front of us, and we continue to test and keep on learning. So I think we're very clear there.

I think then we think about from a pricing point of view. For us, given the strength of the brand, the last price increase we did was just a narrow one back in 2023. And when we really step back and look at our overall price positioning, we look at price, we look at quality, we look at our unique features and benefits, which are way superior to so many others. And we also saw many other brands taking multiple price increases in the last few years as well as just very recently.

So we saw the opportunities for some surgical price increases. We'll continue to assess it. We are always very focused on making sure we have that competitive price positioning and most of all, very, very strong value. So you know, because we've shared before, 40% of our customers don't even cross shoppers with anyone. So the strength of the brand, the continued investments, obviously, with Heidi coming on board and the brands are paying off because you obviously see that people value the brand just beyond price.

So it's a key advantage for us. We'll continue to review over time. We've baked in what we know about tariffs at the moment. And as you know, that's just one-off the levers that we can take, and we're very happy with the great vendor partnerships. I think the last piece, as you know, are structurally higher gross margins than many of our competitors, means that the effective price increase that we need to take is relatively smaller to them.

So I'm very grateful our m surgically review this all the time. As you know, we do take price increases very often. They're very strategic to us. So more to come, but we feel confident in being able to use that lever as needed.

Our next question is from the line of Eric Delane with Craig Hallum. .

So first one on me, just on ever touch. So you're turning on the marketing engine. Can you just expand a bit on what you expect that to look like? Should we expect pretty strong marketing investment behind this launch sort of out of the gate? Or would this be a bit more gradual over time. And then I think you mentioned you plan to expand EverCouch distribution to 100 showrooms in the coming months. Correctly if I'm wrong there, but just kind of help us understand how you're thinking about further distribution gains after that 100?

Yes. Thank you for the question. So yes, I think first for us, as we shared we're in 27 showrooms at the moment. And a big part of that was really making sure we really take the learnings around the demo experience. We really perfect that. Because as Shawn always shares, we want and intend to sell this product for many, many years to come. So I think that first step is very important to us.

And you're right, later in the summer, we'll expand out to 100 showrooms and then the teams have plans kind of beyond that. And I think I feel very good on that. Obviously, we have it nationally available on the website. And as I had shared earlier, we configured and redesigned the website, both in terms of homepage as well as all the navigation and seeing great results from that.

Then in terms of from a marketing engine point of view, we will start throttling that up later in the summer through to the back end of the year, and we will build that over time. And we have the teams with a great campaign launch as well as many other levers that we'll take within the marketing engine. So when we next talk in September for the next round of earnings, obviously, we'll have more news to share with you. I think the key thing, as Shawn shared is the initial feedback is people love the product, they love the style, they love the comfort. Our teams are super excited, which -- they often are the greatest level of feedback for us around what customers want and what they like. So look forward to sharing more with you.

All right. Great. That's very helpful. And then just one more for me. probably for Keith here. Just wondering if you can help us understand a bit more how you see any changes in working capital throughout the rest of the year. Obviously, kind of a use of cash this quarter. You gave us some inventory kind of highlights. If you could just kind of walk through a bit more of a analysis on expected changes in working capital for the rest of the year, that would be very helpful?

Yes, sure thing. So it's actually pretty straightforward through the rest of the year. given we had the big build in the fourth quarter on inventory and given the great payment terms we have with most of our vendors, the payment for that inventory build occurred in the first quarter. So that's -- you saw that flow through dramatically reduced sequentially accounts payable accrued expenses and lower cash. So that puts us in a good position.

Even with some build into the second half for EverCouch, we should probably end up at slightly lower -- again, take all this as estimates, but end up with slightly lower inventory than right now by the end of the year even with the addition of the ever catch. So aside from that, CapEx, we're still sitting around $25 million for the full year is our current estimate. And -- but everything else should be relatively straightforward. We're not a heavy working capital business, given we don't really have accounts receivable, our customers pay really quickly.

So it should be relatively simple other than that nuance within the inventory we just discussed.

The next question is from the line of Matt Koranda with Roth Capital. .

Just wanted to make sure I understood on the gross margin commentary that you gave if we selectively took price last month, but we -- and we likely have non-tariff impacted inventory we're selling in the second quarter, I guess what in particular is the headwind to the gross margin? Is it a product mix shift or promotional headwind that we're factoring in? And then just for the rest of the year, Keith, like maybe for the implied improvement? I guess we'll be probably selling some tariff-impacted product, but there's some pricing benefit, but maybe you can help us understand a little bit more about the positive drivers there in the second half?

Yes. So a couple of things. I mean it really is just nuance around what I talked about before. So we have more tariff-related costs in the inventory in the quarter in a than we will later in the year because there's more China, right? So China has, even before with the inventory they brought in ahead of all the April 2nd stuff had a tariff on it, whereas much of the other countries did not. So more reliance on China is number one.

Number two, we're not going to get full benefit of vendor concessions in the second quarter, which ramps through the year. Number three, the price increase was put in place during the quarter, but that doesn't mean that's the only price increase we'll take this year. That's just our price increase taken this year. There could be more. And you can see how that could flow through. Another one is with the launch of EverCouch, this is a brand new product platform for us, and there are different approaches we could take to headline discounting on it, especially on something brand new like this with early adoption, excitement that exists out there. Our initial goal would be to have less heavy promotional cadence on EverCouch. So as that ramps up, there's an effect there.

So there are quite a few things that drive this, and we're happy to get into more of the specifics offline. But 2Q sort of is the perfect storm of more of the cost with less of the benefits. I didn't mention general efficiency efforts and other things like that, that we're working on as well. The benefits from things like, for example, Mary mentioned before, outbound logistics and warehousing efforts that we have that are kicking in as the year progresses, all of those different factors just kind of work around this idea of a perfect storm in 2Q?

Okay. Very clear. I appreciate that, Keith. And then maybe just curious if Mary, if you could share anything on Memorial Day performance as a barometer for the second quarter demand trends? And then maybe also just curious about sort of how the pricing actions that you guys have put in place thus far have been received and how that might inform sort of future pricing action?

Yes. No. Thank you, Matt. Yes, I think -- I mean, obviously, as Keith shared our guidance for quarter 2 points to our underlying performance, where we're growing, gaining market share, and this obviously factors in Memorial Day performance, which we were happy with. This obviously building on quarter 1 where we're gaining share. So we feel good.

Obviously, we're only partway through the quarter. We have our next big moment ahead with us with the July 4 event. But as we continue to see, we see people excited by innovation, whether it be PillowSac Accenture, the Recliner and all the other things that we have shared. So very similar dynamics, still choppy, as Shawn has shared in some of the category dynamics but feel good on Memorial Day. And I appreciate the teams are really sharpening the communications, testing even more around kind of different promo tactics, different communication tactics. So more to come.

Obviously, we need to get through the July 4 events, and overall, the guidance indicates growth for the quarter, which we feel good about. I think then in terms of your question on the pricing actions, we took that surgically in the assortment where we really identified where there was opportunities looking both obviously in the benchmarking competitively. We're always very focused on having a very strong value proposition. So the team did a great job, great communication out to the sale teams. And since then, feel really good in terms of on the execution for that.

And it just goes back to the strength of the brand. As I shared earlier, so many customers just -- they come to us because their friends have told them, this is just a great product or they've tried it out at their friends' home. So the strength of the brand, obviously really helps us ensure that we get the right balance of the value proposition. So more to come as we go through the year. Obviously, the latest news on China power shift yesterday kind of are baked into our guidance. So I'm hopeful that we can see some relief at some point later this year, maybe 2.

Our final question is from the line of Thomas Forte with Maxim Group.

Great. Shawn, Mary and Keith, congrats on the quarter. So I'm going to ask both my questions once since the call is getting long here. So can you talk about new products, bringing new customers to the brand, the Pillowsac Accent Chair recliner and while very early to EverCouch. And then my second question, when I think about Best Buy, it came around the initial launch of StealthTech. So Shawn, what gives you confidence in your ability to sell consumer electronics type products in your physical showrooms and Costco.

Yes. Sorry, the first half of the question, Tom, I broke up from what you...

The ability of the new products to bring new customers to the brand, PillowSac Accent Chair, the recliner and while it's very early, the EverCouch.

Yes. Yes. This is the -- obviously, the point of these launches and our strategy and product to begin more broadly is to bring new customers to the brand and especially be able to convert more effectively. So if we back up and look at what Lovesac has had success, Lovesac had factional for a long time and had some success and grew before we turned on the marketing machine that you see today.

And one of the most important pieces of that marketing machine for us was simply mass advertising, whether it be TV, especially, obviously, now that's transitioned to over-the-top and digital, social, et cetera. So we're reaching really, the entire country, we have a focus on our core demographic, typically more affluent households between 35 and 45 experiencing household from a maintenance sort of thing.

But as strong as Sactionals are as what we think the best-selling section in the United States of America, there are many reasons that people choose not to buy. And these new products mitigate -- have been developed to mitigate those reasons. And we know specifically what those are through our ongoing research with our customers. And so taking them one at a time, let's work backward.

The EverCouch has a markedly different profile and style and scale to Sactionals. In fact, we're very heartened by how it's performing in more urban markets where spaces are just smaller and it still has the advantage of getting up elevators and through staircases and shipping directly to the home, that sort of thing. And so that's a perfect example of how we're able to not just reach new customers, but importantly convert new customers more effectively that we're turning us down before.

At the same time, it's a photographic game. It's an image-driven game today, especially on social media. And the EverCouch provides us kind of a whole new profile in terms of the way we're shooting it photography wise, style-wise, the types of influencers will use to reach people. And in that way, again, reach more people, reach new people, people that are suited, and for that product, especially based on lots of different points of data.

The Recliner, again, this has been a quarter of the Sactional category motion, and we've just been locked out of it. People would walk into our showroom and say, "Do you have a Recliner." We've heard the Lovesac brand. We see your ads really cool. [indiscernible], our answer is no. And we're off the shopping list. That's now changed and has become a very important part of the mix.

Obviously, it's another really Stealthy invention for us. It looks exactly like a typical Lovesac seat that people might have seen around for a long time, but all of a sudden, it comes to lives and moves, and that makes for great imagery makes for great motion imagery, performs very well on social media and to help us reach new people and open up the quarter of that category that we were not participating in before.

And so we're -- this is the reason Lovesac is growing. At the end of the day, this category has been under address now for 3 years straight. And while it's not our most banner growth years, it would be a really difficult path to growth where it not for these innovations. And then the PillowSac frame has just been crushing it on social media, and it's really just helped us reach a lot of people through its slightly viral launch onto the scene, and it's propelled PillowSac to be our best-selling fact. So it's a really exciting product as well.

Meanwhile, I'll wrap up with Stealth. You asked what gives us confidence to sell [indiscernible] showrooms. It is amazing to us because it was controversial to print Lovesac on the side of a sound bar, you're not seeing, I don't know, Samsung, Sony, you're seeing the name of Lovesac is a prominent name on the side of that sound bar for StealthTech, which is the only piece of it you see because the rest of it is hidden away, right, inside of our Sactionals, et cetera.

And we see no resistance. When we do the research, when we talk to customers, when we talk anecdotally to our showroom managers who are interfacing with people day to day, we are very confident in our ability to become a major player in home audio and beyond home audio in technology in general, we have Stealth tech innovations coming that are not in home audio and will again, hide technology away in the space that we provide on around underneath your couch into other products. And we see no resistance in those show -- in our own showrooms.

And so while Best Buy was extremely useful in helping us establish that credibility. I think based on if you loop all the way back, our mass advertising TV ads that have been reaching people now for years. Just the idea of surround sound, built into the couch underneath the phone, underneath the fabric that can provide strong audio. Of course, people are best to experience it for themselves because it's so good, it's so much better than you think it could be.

And that's where we really see a future for our brand and technology. Why? Because there's no one in the model any more doing it, period. And the only few places that you can go to experience anything anymore are having their own changes in that industry and in customer behavior and whatnot. So Lovesac is going to be the place to experience technology firsthand, Homadio firsthand and of course, in ways that are completely unique to Lovesac, and it's going to be a mainstay of our brand. We're very confident. And we're really excited about it. You're going to see a lot of innovation of StealthTech in the next couple of years.

At this time, we've reached the end of our question-and-answer session. I'll hand the floor back to management for closing remarks.

Thanks so much for joining our first quarter fiscal '26 call. Thank you so much to all of our investors who support this company and, of course, to our hashtagnlovesac family, who are the reason we wake up every day and make it great. .

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.