Lovesac Company Aktie

Thank you. Lovesac's second quarter fiscal 2027 earnings conference call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Colton West, Investor Relations.

Thank you. You may now begin. Thank you. Good morning, everyone. With me on the call today is Shawn Nelson, Chief Executive Officer, Mary Fox, President, and Andrew Farag, 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 the financial situation, 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. We 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.

Good morning, everyone, and thank you for joining us today. I'll start by sharing a brief review of our strategic roadmap, and then I'll provide a high-level summary of our second quarter fiscal 2027 performance and some of the exciting initiatives we've brought to market. Mary Fox, our President, will then take you through our customer acquisition experience engines, operational initiatives, and key growth enablers. Finally, Andrew Farag, our new CFO, will dive deeper into our financial results and provide additional detail on our outlook for the third quarter and balance of fiscal 2027. Before diving in, I want to welcome Andrew, who joined us as Chief Financial Officer just in June of this year. Andrew brings more than 20 years of finance and operating leadership across retail, consumer goods, and manufacturing. He is the right partner as we execute the most ambitious product innovation roadmap in Lovesac's history coming up.

We are thrilled to have Andrew as part of our hashtag Lovesac family. Before discussing the quarter, I'd like to say thank you to all of you for joining us. Step back and think about the broader state of the category and our business. We are all too familiar with the operating environment for the home category over the past several years, up through our fiscal 2027. This K-shaped economy, consumer sentiment, and category headwinds appear to occasionally ease only to pick back up as the macro environment changes. Across the category, we are seeing deeper promotions from competitors than ever before from some of the industry's strongest brands. And while we have adjusted our strategy to remain competitive, we have never lost sight of a simple belief. Consumers do not need more furniture.

They need better furniture and better solutions for how they actually live. Even in this challenging environment, Lovesac continues to gain market share, expand relevance, and accelerate innovation. We built Lovesac as a disruptor by challenging the conventions of a category that had seen little meaningful innovation in decades. Rather than offering another static piece of furniture, we created Design for Life product platforms that are built to last, designed to evolve, and made to love. Our unique products solve the real challenges of how people and families actually live. The proliferation of modular offerings and copycat brands seeking to replicate some elements of our model validates the opportunity that we identified. But it doesn't dilute our leadership because our differentiation extends beyond configurability.

It is grounded in fully backward and forward compatible platforms, protected intellectual property (IP), continuous innovation, and a growing ecosystem of products and services that increase the value of ownership over time. We believe these advantages position Lovesac to expand awareness, deepen customer relationships, and take significant market share in this large and highly fragmented market. The convergence of our foundational capabilities that we began investing in years ago has picked up significant momentum in this Q2 period. Our product platform innovation engine, our digital-first marketing playbook, and our customer data infrastructure are all positioning us to enter this next phase of profitable growth with a stronger competitive advantage than at any point in our history. Turning to our second quarter performance, we delivered our highest quarterly sales ever outside of Q4 in our company's history. Our record results were within our guidance range, despite an offering backdrop that remains challenging.

We delivered net sales of $161.2 million, a slight increase to last year. Importantly, we continued to gain market share, reinforcing that our platform model and brand proposition are resonating even in an uncertain consumer environment. When customers clearly understand the durability, flexibility, and long-term value embedded in our Design for Life platforms, they continue to engage with our brand. We saw particular strength on larger Sactionals configurations and premium enhancements, which gives us confidence that our value proposition remains compelling when the customer is ready to consider. We are also thrilled with the early read and attachment rates of our white glove and room of choice delivery programs, which we have recently piloted and plan to roll out nationally in the second half. Innovation continues to be the most visible proof point of our value proposition. The reclining seat addition to Sactionals and our new Snug sofa platform both reinforce the power of our platform approach during the quarter.

Reclining seat deepened engagement with Sactionals boasting record high attachment rates, while Snug broadened our reach with its more digitally advantaged incremental offering. More than 50% of Snug sales are occurring online as intended with its simpler feature set, simpler shopping experience, and lower entry price point. Not isolated product lanes, they are evidence that our platforms can expand customer relevance, create new entry points, and compound value over time, all of which increase our confidence as we launch the most prolific innovation roadmap in Lovesac's history that we'll be rolling out with the introduction starting in the second half. While the macro environment continues to create friction on opening price points for Sactionals, we are encouraged by the improvement that we have seen on those below $6,000 setups, and the engagement we are seeing in the funnel, including quote activity. We also recognize that in this environment, some customers are taking longer to convert. Our job is to meet that moment with sharper accessibility and value perception while preserving the premium positioning and attachment opportunities that make Lovesac distinct. As Mary will discuss, we have invested in pricing optimization that we expect will recapture the opening price point consumer and better position us in the second half.

Looking ahead, what excites me most is that we are continuing to challenge the conventions of the category through the acceleration of our product platform innovation engine. Building on the successful launches of Reclining Seat and Snug, the second half of fiscal 2027 will represent the most prolific period of new product introductions ever. While we can't share all the details, we will be launching innovation that unlocks even more personalization and comfort in our Sactionals platform, extensions to the Snug platform that will enable greater functionality and consumer appeal, and a brand new seating platform that will broaden our total addressable market (TAM) and attract a more premium customer segment. All of this will begin to take effect in Q4. And of course, all this comes ahead of the launch of our new room in FY '28, which remains on track. Preparing for this period of accelerated innovation requires planned investment in inventory ahead of the associated revenue opportunity.

While product platforms will always remain a superpower to Lovesac, history has proven that brands become bigger and more valuable than products alone. We wake up every morning to our stated mission of building the most loved home brand in America. We shared with you in Q1, the launch of the Here for Life campaign. I'm pleased that Q2 brought significant momentum as we shifted from simply telling our story to embedding Lovesac into cultural moments and conversations in an authentic and equity building way. Finally, as we've discussed the past several quarters, we will be launching our initial onshore production of [indiscernible] in the second half of FY '27, bringing with it speed, flexibility, and automation, while remaining forward and backwards compatible with every generation of Sactionals born and yet to come. The net result of these efforts will be improved customer experience, stronger margins, and a further reinforced IP moat. In closing, as we enter the second half of the year, my conviction in the opportunity ahead of us has never been stronger.

The capabilities that we have spent years building are converging simultaneously, starting in that second half. Product innovation that expands our total addressable market (TAM), brand building that turbocharges our new customer acquisition, customer data infrastructure that unlocks quote conversion and LTV, services that build in deeper, longer lasting relationships, and a supply chain that brings manufacturing closer to the customer. To reinforce why we are so confident in our second half, particularly Q4, we have four significant innovations to launch even before we get to that new room that is hotly anticipated for next year. One of these four might have been our once big annual innovation in any prior year, and they represent some of the payoff from our years of R&D that we have been long investing in. We will be very focused on bringing all of these to market over these next six months. We expect to further dominate Sactional sofas with the launch of a Snug corner piece and ottoman that can transform any Snug chair, loveseat, or sofa into a full Sactional platform, as well as the reverse compatible swivel base for the Snug chair. That Snug chair with the swivel is my new favorite product.

I have seven of them throughout my home at this point. Snug is thus our small format Sactional sofa platform. We also have a significant innovation to introduce on the Snug Sactional platform as we onshore that will unlock personalized comfort in every seat that is unlike any modular Sactional sofa on the planet. And finally, we will launch an entirely new, very large format Sactional platform that will expand our TAM and attract an even more premium customer. There is another big introduction after the holidays that we are not ready to speak to in any detail yet. So, and four of these huge innovations will solidify Lovesac's ongoing and growing leadership in Sactional sofas. All of this innovation will begin to take effect in Q4.

And combined with the full national rollout of white glove and room of choice delivery services, it's going to be [indiscernible] positions Lovesac to compete like never before. We enter the second half of the year from a position of considerable strength. Our balance sheet remains healthy with a strong cash position, no debt, and inventory that is better aligned to demand. And this merely sets the stage for FY '28, when we will be bringing Design for Life to an entirely new room of the home, which remains on track. Financial benefits of all this will not arrive all at once. We believe the cumulative effect of these initiatives will become increasingly visible over the coming quarters, reinforcing our confidence in the long-term algorithm that we are building. Finally, I want to thank our teams, associates, partners, shareholders, customers, and the entire hashtag Lovesac family for their continued dedication, creativity, resilience, and passion as we continue to live up to our stated purpose: To inspire humankind to buy better stuff, especially our stuff, so they can ultimately buy less. With that, I'll turn the call over to Mary.

Thank you, Sean. I'll build on Sean's remarks by focusing on how we are translating our platform advantage into customer acquisition, conversion, and long-term engagement. As Sean discussed, Lovesac was built as a disruptor by challenging the conventions of a category that has seen little meaningful innovation. Our Design for Life platforms continue to set us apart by giving customers adaptable solutions that evolve with their lives and increase the value of ownership over time. Like traditional furniture purchases that depreciate in value and relevance over time, our customers enter our platforms through highly differentiated product offerings and remain engaged through a steady stream of innovation, upgrades, and enhancements that increase the value of ownership over time. This creates a powerful economic model, strong customer acquisition supported by years of follow-on engagement and lifetime value enhancement, all tied to an initial customer acquisition cost that pays back on the first purchase. As we turn to Q2, we are proud of how our team has executed, delivering the highest Q2 revenue in our history in an environment and category that remains dynamic. Against this backdrop, we continue to keep one hand on the now and one on the next, strengthening our core business and expanding our business.

Accelerating customer acquisition to deliver in the near term while building the most prolific innovation roadmap with launches to come every quarter over the next year, alongside the capabilities and infrastructure that will accelerate Lovesac's next chapter of growth. As Sean reviewed, demand with our premium customer remains healthy as reflected in our performance with configurations over $6,000. Q2, we saw the segment grow double digits even against a very strong prior year [indiscernible], led by larger configurations, premium fabrics, and our newest innovations. These customers are spending more, and our premium mix remains structurally stronger than it was two years ago. As we discussed last quarter, the opportunity remains below $6,000, where these customers have been disproportionately impacted by the last several years of inflation and raising rates, as well as the significant spike in gas prices, including Labor Day's all-time high. In Q2, the tactics we executed improved the run rate of the under $6,000 business. But it has not yet been enough to return that segment to growth. So in Q3, we invested in pricing and optimized our promotional strategy to improve accessibility at key opening price points while preserving the premium positioning, innovation, and attachment opportunities that continue to resonate with the higher price point customer.

With our Labor Day event still underway through this weekend, it is too early to get a full read on the performance from these changes, and this is why we are taking a more conservative approach in our outlook as Andrew will review. Turning then to our customer acquisition engine performance in Q2, our brand and performance marketing strategy continues to evolve from merely driving transactions to building a modern customer acquisition, lifetime value, and brand love engine. Our Here for Life campaign, a full 360 degree campaign across paid, owned site, store, and retail partners ran across every major customer touch point and successfully strengthened engagement, consideration, and emotional brand relevance. Our marketing efficiency and ROI improved significantly during the quarter, and we are bullish that the foundational work we have put in place will better drive investment towards the channels and journey moments that demonstrated the strongest demand creation. Q2 was among the most visible periods in Lovesac's history as programming around the World Cup in partnership with Trevor Noah, activating at the CMA Fest, and expanding our creative partnership generated more than 3.2 PR impressions, significant growth in our social engagement, an increased top of funnel strength across awareness and consideration. Now, this is just the start. The faster we transform our communication from functional benefits into entertainment, fandom, and community anchored on the universal truth, that we do tend to spend our time on the couch with the people that matter to us.

The faster we will build a brand that transcends category conventions and earns a larger place on consumers' hearts through cultural relevance. This is the best way to [indiscernible]. This brand transformation is underpinned by investments in new customer data capabilities, AI, and search visibility, media mix optimization, and a more sophisticated marketing engine that will allow us to efficiently scale new customer acquisition while improving return on investment. Just as importantly, we're on the precipice of connection. Brand building and customer relationship management (CRM) through a unified CRM transformation that is being implemented in Q3. This will unlock the capability to deliver personalized customer experiences at scale, putting the right message with the right incentive at the right funnel moment to support the customer based on their individual journey. And we look forward to sharing more on this critical initiative on our next earnings call. Next is our digital configurations and how we bring Lovesac to life online. We know many of our customers begin their journey online and often purchase in-store.

This is the power of our omnichannel model, and we continue to advance our digital playbook to better communicate and bring customers through the purchase funnel, which we believe will bear fruit in half two. As with Q1, we continue to see record levels of web customer satisfaction, demonstrating that our focus in enhancing customer experience and reducing friction will continue to scale. Our showroom network continues to demonstrate the strength of our model and prove that when customers experience Lovesac firsthand, the power of our platforms become tangible. Despite the headwinds we mentioned on the under $6,000 customer, our associates were able to drive a double-digit increase in conversion while building a strong quality quote pipeline. That conversion performance helped offset the traffic pressure and contributed showroom growth beyond the benefit from new locations. These results reinforce our core belief that when customers can interact with our brand and platforms in a tangible way, we are able to translate consideration into purchase. Traffic remains our primary opportunity and the brand investment, activation programs, and customer acquisition initiatives remain paramount focus entering the second half.

Our partnership demonstrations continue to introduce customers to Lovesac and serve as an important awareness driver for our brand. Our performance was driven by the strategic exit of our Best Buy partnership in Q3 fiscal '26, which accounted for 160 basis points of total growth for the business. For Costco, our operational improvements, cross-segmentation, staffing optimization, and assortment enhancements continue to generate encouraging results, and partnerships remain a key focus for efficient customer acquisition that extends our reach while preserving the integrity of the Lovesac brand and customer relationship. Finally, our customer relationships remain the most important element of our customer acquisition engine. Unlike the traditional furniture model, we are not built around a single transaction. Our platforms create opportunities to remain engaged with customers through services, upgrades, new products, and resale throughout the life of their owners. In Q2, we gained significant traction across the suite of value-added services.

[Indiscernible] choice delivery programs are focused on attracting new customers to the brand and improving the post-purchase experience. A lack of delivery options beyond our fast and free program has been a friction point for some of our customers in the past. And after successfully piloting these programs in the first half, we will be rolling out now nationally in Q3 of this year, and we are pleased to see the growing attachment rates. Loved by Lovesac, as you know, our resale program continues to gain momentum with 70% of customers on the platform new to the Lovesac brand. This creates an attractive entry point to our platforms and an important component of our long-term customer acquisition strategy. So then pivoting to our critical growth enablers, our ability to continue our long history of market share gains depends not only on the products we design, but also on the operating capabilities behind them. Our supply chain continues to become more recession, resilient, and scalable, creating a true competitive advantage.

We have successfully navigated the pressures of the current inflationary environment, particularly with oil, and are driving improvements to our operational metrics and unit economics while supporting a broader assortment, optimal inventory mix, and a growing innovation engine. Our ocean freight partnerships have ensured capacity at contracted rates, helping to insulate our P&L from the dynamics of the broader market while we continue to plan conservatively to mitigate risks on domestic shipping inclusive of last mile. And then finally, on tariffs, our assumptions remain consistent and we continue to mitigate through sourcing diversification or operational discipline, and fuel for growth cost savings programs. As you saw in our release, we received approximately $21 million of IEPA tariff refunds to date. And Andrew will discuss the amount received and its financial statement impact. Lastly, as discussed, our initial onshore production of Sactional seats remains on track to begin manufacturing in Q3, not only bringing seat production closer to the customer, but enhancing comfort, functionality, and ease of assembly while expanding our IP moat. In sum, I will leave you with a few key takeaways. As Sean shared, we are laser focused on igniting the core of our business, winning across all pricing segments by improving accessibility and strengthening value perception while launching our most prolific innovation roadmap in our history.

These new innovations are in the DC and on the water as we speak and will begin to take effect in Q4. We are evolving our customer acquisition engines, modernizing our marketing playbook ahead of our big Q4 tentpole events. We're strengthening our winning omnichannel model and rolling out delivery services nationally in Q3 to remove friction and build customer relationships. And all of this is happening in parallel as we finalize product and go-to-market plans for the new room of the home launching in fiscal '28. With that, I'll turn the call over to Andrew who will provide additional details on how these customer channel and operating trends translated into our second quarter financial results and outlook.

Thanks Mary and good morning everyone. As Mary discussed, our second quarter performance displayed our commitment toward execution of our strategic priorities against a challenging macroeconomic environment and uncertain geopolitical backdrop. I'll focus my remarks today on three areas. First, the IEPA tariff refunds. Second, our second quarter financial results and quarter. We received a $21 million benefit related to IEPA tariff refunds and related interests. Of that amount, $20 million was recognized through cost of merchandise sold, $0.3 million reduced inventory and $0.7 million was recorded as interest income within interest and other income, net. As of this call we have received substantially all of our expected refunds.

We will be opportunistic in leveraging these funds where we see a compelling return on investment as well as offsetting supply chain cost pressures while maintaining our commitment to profitability and balance sheet strength. Turning to our second quarter financial results, net sales increased 0.4% to $161.2 million. This was supported by the contribution from 14 net new showrooms opened over the past 12 months, helping to partially offset the omnichannel comparable sales decline of 1.9%. Our comparable sales performance reflects demand trends that Sean and Mary discussed with strength among our premium customers, particularly for larger Sactional configurations and newer innovations, partially offsetting the continued pressure below the $6,000 price point. Showroom net sales increased 4.6% to $114.1 million, reflecting a contribution from new locations, as well as a strong conversion performance Mary discussed, which helped offset continued traffic pressure. Internet net sales declined 5.3% to $40.2 million, while other net sales declined 23.2% [indiscernible] 3.2%, primarily reflecting the closure of the Best Buy Shop and Shop Partnership. From a product perspective, Sactional net sales declined 1.7% and Sactional declined 8.6%, while other products increased 198.2%, supported by continued growth in newer categories, including Snug and accessories.

This growth provides early financial validation of Lovesac's ability to disrupt new product categories through innovation and extend the Lovesac platform. Gross margin increased 1,200 basis points to 68.4% compared to 56.4% in the prior year period. Primary driver was the recognition of IEPA tariff recoveries. Excluding tariff recoveries, Q2 gross margin was approximately 56%, representing a 40 basis point reduction in gross margin. This performance reflects approximately 160 basis points of inbound transportation tariff costs, 130 basis basis points of outbound transportation and warehousing costs. These pressures were partially offset by approximately 250 basis points of improvement in underlying product margin, reflecting the benefits of pricing and cost reduction initiatives. SG&A expense increased 0.3% to $72.3 million. As a percentage of net sales, SG&A improved 10 basis points to 44.8% compared to 44.9% in the prior year period.

The increase in SG&A dollars was primarily driven by approximately $1.9 million of higher payroll related costs, including severance, and approximately $0.8 million of increased overhead expenses. These increases were largely offset by a $1.5 million impairment charge related to the Best Buy partnership termination recognized in the prior year period and approximately $1 million lower equity-based compensation expense. Advertising and marketing expense declined $0.7 million to $22.8 million and improved 50 basis points as a percentage of net sales, reflecting higher efficiency and investment timing. Operating income for the quarter was $10.9 million compared with an operating loss of $8.8 million in the second quarter of last year. Driven by the fact that the operating income for the quarter was $10.9 million, the operating by the factors we just discussed. Before discussing net income and Adjusted EBITDA, refer to terminology and reconciliations between our non-GAAP measures and our most directly comparable GAAP measures in our earnings release issued earlier today. Net income was $7.4 million or $0.51 per diluted share compared to a net loss of $6.7 million or negative $0.45 per share in the prior year period.

Net income for diluted share in the second quarter of fiscal 2027 includes an $0.86 net benefit from tariff refunds. During the quarter, we recorded income tax expense of $4.7 million compared to an income tax benefit of $2.1 million in the prior year period, driven primarily by the generation of pre-tax income in the current year quarter compared to a pre-tax loss in the prior year quarter. As a reminder, our effective tax rate can fluctuate based on the level of pre-tax income and the impact of discrete items, including stock-based compensation and other permanent tax differences. Adjusted EBITDA, which excludes the $20 million tariff refund benefit recognized this quarter, was a loss of $1.3 million compared to income of $68.8 million in the prior year period. Turning to the balance sheet, we ended the quarter with $68.8 million of cash and cash equivalents, no outstanding debt, and $34 million of available borrowing capacity under our revolving credit facility. Operating cash flow was a use of $11.4 million compared to use of $29.2 million in the prior year period. The improvement was primarily driven by the receipt of IEPA tariff refunds, working capital performance including a $34.3 million increase in accounts payable, partially offset by investments in inventory, accounts receivable, and prepaid assets to support future growth initiatives.

Inventory ended second quarter $130.2 million compared to $124 million in prior year period. As Sean and Mary discussed, we are preparing for a significant cadence of product innovation in the second half of the year. Planned increases in inventory supports those upcoming product launches, platform expansion, and appropriate in-stock positions. We continue to maintain a strong liquidity position and believe our balance sheet provides substantial flexibility to support innovation, growth initiatives, and disciplined capital allocation. In the first half of fiscal 2027, we repurchased approximately $7.2 million of common stock, leaving approximately $46.9 million remaining under the current authorization. Before turning to guidance, I'd like to highlight the key assumptions embedded in our outlook. From a macro perspective, our guidance assumes existing home sales and housing-related demand remain generally consistent with current trends and customer discretionary spending remains in line with recent purchasing patterns. Our outlook reflects the freight, transportation, logistics, costs, and tariff rates known today, and with the exception of Adjusted EBITDA, includes only tariff refunds already received and does not assume future recoveries. Finally, our guidance incorporates a more prudent, risk-adjusted approach to our Q3 and full-year outlook.

As Mary reviewed, we are in the midst of changes to our pricing and promotional strategy, and while we believe the actions we are taking will continue to improve our performance with the below $6,000 purchases, we believe it is appropriate to take a conservative view at this stage, particularly as we do not yet have a full assessment on how these will impact our ongoing Labor Day sale. In addition, with our new products in transit, we now have greater visibility to the timing of these launches, which we now expect to begin in late Q3 with a more meaningful impact expected in the fourth quarter. Importantly, our outlook also reflects our ability to maximize operating leverage to deliver positive net income for the fiscal year. For the third quarter, we estimate net sales of $140 million to $150 million. This includes gross margins of 54.5% to 55.5%, advertising and marketing of approximately 14.5% as a percent of net sales, and SG&A of 47.5% to 49.5% of net sales. We estimate a net loss to be between negative $9 million and negative $12 million. We expect Adjusted EBITDA loss of between negative $7 million and negative $10 million.

And we estimate basic loss per common share to be between $0.62 and $0.83 with 14.5 million basic weighted average shares outstanding. For the full year, we estimate net sales of $690 million to $710 million, which includes fourth quarter net revenues in the range of $250.5 million to $260.5 million. For the full year, this includes gross margins of 58.5% to 59.5%, advertising and marketing with approximately 12.5% as a percent of net sales, and SG&A of approximately 40.5% to 41.5% as a percent of net sales. We estimate net income to be between $0.5 million and $18.5 million. We expect Adjusted EBITDA between $31.5 million and $35.5 million. We estimate diluted income per common share in the range of $0.98 to $1.26 and approximately 14.6 million estimated diluted weighted average shares outstanding. We estimate a full year effective tax rate of approximately 36% to 38%, which reflects current federal and state tax laws, stock based compensation activity, and other permanent tax items.

For modeling purposes, we would expect the tax rate for the remainder of the year to remain generally consistent with our full year outlook absent significant discrete tax events. In closing, I'm excited to be part of the team at Lovesac at this pivotal moment preparing for our next chapter of growth. My first three months in the role, I am confident we have the right team assembled with a clear commitment to creating long-term shareholder value with a meaningful competitive advantage. In my role, I'll be looking to partner with the business to profitable growth and operational scale while ensuring we improve the predictability of our execution and financial results. With that, Operator, let's open the line for questions. Thank you.

[Operator Instructions]

Great. Sean and Mary, always nice to hear from you. Andrew, welcome to Lovesac. I have one question, one follow-up. I'll go one at a time. So, Mary, can you give additional thoughts on Love by Lovesac as a means to capture a customer who's increasingly more focused on value right now, given the challenging macro backdrop?

Yes, hey, Tom, thank you for the question. And we are, as you know, scaling out Love by Lovesac. It's been a huge proposition for us, and so we had to build all the processes. But really for us, this is enabling customers to be able to have access into our brand, to our open box inventory. And as you know, we grade it, you know, like new and then at good. And I think, you know, the challenge for us at this point is, well, we built all the processes, we're now in 32 states, there's four more coming actually, in the next couple of months, is how we message that and share that with the customer is all up to us. So we're seeing a lot of customers engaging around buying new, getting recovers as replacements, and 70% of the customers that are coming into Look by Lovesac are new to our brand.

So expect to see a lot more from us, first was getting the foundations in place, then so that we can build that velocity. And we are also planning one outlet that will be opening in Chicago because we do see that as an opportunity, particularly for customers to come and see the inventory. So we'll share more on that, Tom, as we come. But all of it just reinforces what our brand can do that really no one else can do. Can do because of the modularity, the ability to ship it with very good economics, and be able to allow people into the platform, but then add on all the amazing innovation Sean has talked about that is reverse compatible with that product. So we'll share more as we go, but to your point, there is opportunity to capture that under 6K in this way. And that's why we're very committed to continue.

Drive the program. Excellent, Mary. Now I have a much more fun question. So can we talk about your efforts to capitalize on higher income consumers who appreciate the brand, including the upcoming higher end Sactional services, higher end covers, et cetera? In addition, how should we think about your couch share in formal living rooms as compared to less formal rooms in the home? And then lastly, would you consider shopping shops with higher-end retailers such as Nordstrom?

Thanks, Tom. This is Sean. I'll take that. Yeah, we are so excited about new product rollouts and focused on expanding our share of the living room overall before we get to, of course, the new room in March, early next year. And, you know, Snug was our first step trying to shore up our ability to sell into smaller spaces, with a lower entry price point. And this introduction of the Snug corner piece in ottoman will really complete that offering, giving us a, let's call it, a small format Sactional sofa solution that have our medium format Sactional sofa solution that can do everything, right, in Sactional, changeable, rearrangeable, shippable, endless configurations with all the accoutrements from StealthTech to Recliner and more to come. On that, you know, tried and true platform that currently is the lion's share of our business. We have one of the most compelling innovations ever that's linked to our onshoring opportunity that's in motion right now. And so you'll be seeing that roll out before the end of the year and [indiscernible]. And it will put further daylight between the Sactionals platform and everything else on the market. But not to be outdone, your point about the higher-end consumer showing strength through this time of general weakness in the broader category. We have a large format Sactional coming that is amazing. This is a product that I think, anyone familiar with Lovesac is going to want in their home.

It's a different profile. It's a different look. It's luxurious and targeted to that higher end consumer that's been looking for that profile. We know this through our research. And so you'll see that come live in Q4. And that's a big piece of our guidance. You know, a couple of these new innovations, we had been targeting Q3 for launch. And, uh, while they'll kind of catch the very end of Q3, they won't make a material impact until Q4. And this is the reason that we've guided the way we've guided. Excited about the notion of further dominating the living room, let's call it.

You'll also be seeing some complimentary products around the edges launched in Q3 and Q4 as well, so that we can shift our focus into the new room in the coming year. It's really about taking further share of the living room category by anchoring in Sactional sofas. So we're really excited about all these new innovations and looking forward to producing those results.

Thank you. The next question is from the line of Eric Des Lauriers with Craig-Hallum. Please proceed with your questions.

Great. Thank you for taking my questions. First one's here just on the new product roadmap. First, in terms of timing, so it sounds like launching at the end of Q3, I think Mary mentioned launching one new product per quarter. Sounds like a premium Sactional will be out by Q4. So can you just kind of help tie this all together? Is it sort of one per quarter? Should the premium Sactional, should we be thinking of that as kind of first out the gate? Is it correct to think that the premium Sactional is kind of the biggest impact to the P&L out of these other product innovations that you mentioned?

That you outlined today? Yeah, no, thank you, Eric. I'll take it and then, Sean, maybe you want to add on to it. So I think, you know, first, you know, there's going to be more in in innovation launches in some of the quarters. I think for us it's really just reinforcing Sean's message around it's the most prolific innovation roadmap that we've ever seen and typically, as you know us, we might have had one innovation for the whole year. We now have a very sturdy drumbeat that's going to continue. So I think the first one, as Sean mentioned, is we have the Snug platform and all the great additions that are coming in that really take this platform that's incredibly elegant, can really be seen in many rooms of the home. I think Sean mentioned, you know, your most favorite product is the swivel that is reverse compatible with the Snug chair.

So for everyone who's already bought it, they come and add on and then everyone forward can have it at the beginning, as well as having the corner piece and the ottoman that really builds this out to just being a beautiful Sactional. So that you'll see in Q3 towards the back end. Then as Sean mentioned, you know, Eric, around the premium Sactional, the Sactional that's coming through that is just a beautiful product. And really having experienced it and sat with it, it is unbelievable. It is the best seat I've ever experienced, obviously, alongside with our Sactionals. And then the powerhouse of the business, so much of what has brought us here to nearly 28 years is our Sactional. Bringing this incredible innovation around, you know, the Sactional, bringing this personalized comfort. We can't wait to show everyone, because I think, Sean, as we discussed, it really is in a group of just one. No one else has anything like this, and it is going to bring something that is true innovation to the category.

And then, as you're right, in terms of then the other cadence. And we'll have another launch coming soon after that that we look forward to sharing more with you. And then that continues to the new room. So maybe, Sean, you want to add a little bit to that because that's not just a couple of products. That is a full room complement. Yes, I mean the key take. Oh, go ahead.

So the key takeaway here is that heretofore, Lovesac has been seen as a Sactionals company. And very quickly, just over the next quarter, we will be a Sactional sofa company, of course, with our leading platform in the Sactionals. But Snug has been continuing to grow on itself. Continuing to take a little bit of share of business and it will continue to climb, we think, as our research shows us that the customers want to get more out of Snug and the corner piece in ottoman is going to unlock that. And then with this large format Sactional. So what was kind of like, a one trick pony in the sofa Sactional land with with Sactionals is as tricky as that pony is. There are silhouettes and footprints that we just weren't addressing that we will be fully locked in on going forward and never looking back. And so, you know, surround that with these complementary products will just show up much better against the incumbent competitors that have much more prolific offerings than we have up to this point.

And that will carry us into next year where we have yet another really exciting announcement to make just after holiday. And that will all proceed, of course, our launch into the new room. And so each one of these individual Sactional sofa introductions, as well as the one to come after holiday, would have been one of our anchor launches for a year in past years, and they're all culminating over the next couple of quarters. You know, four big launches over the next couple of quarters, again, preceding that launch into the new room, which has been a three- and four-year investment and drag on our SG&A, to be quite honest. And so we're really excited to turn on all of this new revenue opportunity that has heretofore just been expense.

I appreciate that color. And then related and kind of looking at the lowered outlook for the year here. Was there any sort of delay in the new product launches that contributed to the sort of lowered outlook here? I know promotional environment was kind of cited as the primary driver, but just wondering, you know, and I think we were previously just talking about the premium Sactional, and now obviously there's sort of three or four new products, um, has that led to any complexity or or delays that that influenced, uh, the reduced outlook? I just kind of wanted to get a little bit more color on that. Thank you.

Yes, thanks. So, uh. Yes, to be straightforward, we were looking to have the Snug additions, which are meaningful, corner piece, ottoman, and swivel pieces. The Sactionals addition, which is linked to our onshoring efforts, and the large format Sactional that is yet to be revealed, all launching in Q3. The only one that will be live for part of Q3 meaningfully will be the Snug introductions. And so both the Sactional and the lounge will be live. Onshoring effort linked to that new Sactionals innovation as well as the large format Sactional will be right at the end of Q3 really with no meaningful impact into Q4. And this is the reason for the shape of our guidance. And so while we never like to pull things down out of an abundance of caution, especially, you know, linked to the fact that we're in the middle of our Labor Day event right now, which is one of the top three tentpole anchor events of the year. And with the shift in timing, normally by this earnings call that we're on, we will have already been through that Labor Day tentpole event completely and have a good read, but in this case, we're right in the middle of it.

So just out of an abundance of caution, we've taken, as you can see, some of the, you know, some of the outlying, some of the top line expectation out of Q3 and [indiscernible]. And, you know, just a little bit temperance on Q4 as well. Therefore, a more conservative outlook for the balance this year, [indiscernible] think is prudent. But we have lots of excitement and hope and expectation around these new products and think they're going to do great.

Yes, I think the other just one other point, Eric, to add is, you know, we talked and we've been working on this for years. So really excited is rolling out services nationally. You know, one of the key advantages of services versus fast and free is our customers can select and schedule their delivery. And that does does cause a little bit of lag in timing, whereas typically Fast and Free is shipping out in days. The customers can select. So we're thrilled we're going to be nationally launched, so shipping out to every zip code through white glove and room of choice. But that does cause a little bit of lag as we kind of cycle through a year of having just some of that demand to net sales shift. But, you-know, it's a one-time impact.

But, you know, all in all, I think, as Sean said, really the biggest shift was around the innovation timing. We have a very clear line of sight. Some is in the DC and then some is on the water. So now we're able to be incredibly sharp on all of our assumptions around the guide. And I think Andrew coming in as our new CFO gave us a really good ability to go through all the assumptions, really be surgical on the timing, and then really be committed to give a very pragmatic, prudent outlook for the year that we know we can deliver on, given all of these inputs. So just grateful for, uh, you know, that sharpness as we look year to go in execution. Meanwhile, the teams are incredibly passionate.

Every year we drive to gain share and we're able to. We have demonstrated that every year, and you can expect that from the teams, and I really appreciate them for all of their work. Because as Sean said, the most prolific innovation cycle we're going into. There is just great work happening behind the scenes, and we can't wait to be able to share all of that with you soon.

Thank you. The next question is from the line of Maria Rips with Canaccord Genuity. Please just leave your questions.

Great, good morning and thanks for taking my questions. So you mentioned sort of some customers are taking a little longer to convert. Can you maybe refresh us on your credit card and sort of other financing programs? Is this one of the levers that you're able to pull to help conversion? And are you seeing any changes in consumer behavior when it comes to financing options today versus, let's say, six or 12 months ago?

Thank you, Maria, for that question. So I think certainly we have many levers available for us to help with that final stage of conversion. Some of it has been around the events and sharpening those up, as well as the a little bit of what I shared earlier around tightening up our MSRP, particularly in the opening price point. I think on financing, and we've shared these trends, is we continue to see very clear segments of customer wanting financing and really buying into it, but there is less in financing for us overall. And I think that really is just a matter of just customers have more and more choices through their own banks and many other vehicles. So we continue to test and learn, always looking in terms of every opportunity to be able to drive acquisition. But I think back to kind of the beginning of your question, we're still seeing very similar. Similar sentiment and behaviors from customers.

You know, they'll come in, they'll do their research, they'll maybe start online, they go to the showrooms, they build their quote, and then really convert, particularly at key temporal moments, you know, and really being able to give them the best prices and allow them to drive a lot more on the innovation, add-ons, and all the other things that only we can really give to them compared to any other brand. So expect us to continue to test and learn through the rest of this year. And obviously, financing will be part of that.

Got it. That's very helpful. And then how should we think about incremental marketing spend in Q4 to support your sort of aggressive product launches? Broadly for product heavy quarter like that what are your thoughts on the optimal mix of brand versus performance to sort of to optimize how both sort of work together.

Yes, I think, you know, as we have baked everything into our guidance, I think that's number one. And, you know, very perceptively, you'll pick up that we have shifted some of our marketing spend because, you know, to Sean's point, with all this incredible innovation, normally it'd be one a year. You know, we now have a very steady drumbeat of very significant launches. We do want to be able to share that out. We have a big campaign coming up and being able to put the money behind that, that not only continues to drive as you talk at the very upper end of the funnel, on the brand, you know, we started the campaign Sean mentioned earlier around Here for Life. That really is around cementing this brand, and all of the options that we give to customers, all, you know, based on our Design for Life product platform. Uh, but then as you dip down into the funnel to be able to have the right level of marketing spend, to be able to drive, you know, product storytelling, and conversion, you know, and I think one of the great things that Heidi and her team have been doing is a lot more of the evolution around paid, earned, owned, and also really moving a lot more around digital investments and social first investments. So, you'll continue to see a lot more of us on that versus what you have seen obviously traditionally from a heavier linear investment.

So, Q4, you will see more of that ramp up, really building on continuing to tell the story about the brand, but also making sure you leverage that story down through the platforms. And just really excited, you know, Sean and I got to review the work that the team are doing on the Q4 playbook and how they're going to tell that story and just all of, you know, Sean, to your point, we're just going to have great strengths in Sactionals as a full category. All the great innovation that's to come. And, you know, our job is to tell that story and really stand in a category on our own because of just the very unique and compelling customer-facing innovation.

Thank you. The next question is from the line of Matt Caranda with Truist Capital. Let's just see what your question is.

Hi, this is Joseph on for Matt. Just as we look at the full year guide, just can you help us with the EBITDA cut of $7 million at the midpoint? Just how much of that if you to the extent you can, how much of that is removing IEPA tariffs versus the software demand outlook and incremental cost pressures from, you know, logistics and input costs? Costs and if any promotionality is assumed in the new guide.

Thanks, Joe. This is Andrew. I'll answer that. So as we think about EBITDA specifically in the fourth quarter, even for the back half of the year. You will see, again, based on our seasonality, you will see an improvement to our EBITDA, and that's what we're showing. That's really driven by, again, like Mary and Sean mentioned, new product launches around innovation. That's also tied to our services. And then there's optimization of our customer acquisition engine that we're factoring in there. So all those are driving the profitability pickup along with just normal seasonality of the business.

As it relates specifically to tariffs, tariffs is not part of our EBITDA calculation. Not in our part of our Adjusted EBITDA calculation, not in our guidance, nor is it in our actual results. So there is no, there's no underlying pickup as it relates to that in particular. As we think about, you know, things around, you know, costs of fuel and freight, those are all factored in and those are all steady states. So everything that we know today is baked in there. Okay. If we think about the pricing and promotion. Obviously we're four weeks into an adjusted pricing and promotion scheme. We're looking to test the efficacy of that.

That's why you see that we've taken a more conservative approach to guidance overall as it relates to the second half, particularly in Q4. And at the midpoint, we're still looking to have, you know, modest to flat growth as it relates to the back half of the year, specifically a quarter orders in question, but we're fairly confident. I think you'll see a guidance that's more rooted in financial discipline and it's built on credibility from what we can defend and how we execute on that through the remainder of the year.

Got it. All right. Thank you for taking my question.

Thank you. Our next question is from the line of Brian Nebel with Oppenheimer. Please proceed with your question.

Hi, this is Casey McKenzie on behalf of Brian Nagel from Oppenheimer. Thanks for taking my question. I just wanted to understand, outside of promotional activity and the timing of new product launches, could you discuss a little bit the extent to which macro pressures contributed to the reduction in guidance and whether the demand trends turned more challenging during the quarter and possibly what specifically changed versus prior expectations. Thank you.

Yes, Casey, thank you for the question. So I think overall we're really not assuming any differences in terms of any of the macro impact consumer sentiment. So it really is very much what we've seen for the first half and we've been sharing out. And then [indiscernible]. Then that continuation through the rest of this year. Really the key drivers around the updates in the guidance are really around the innovation timings. You know, and obviously coupled with that is then activating through the marketing campaigns and just that continued customer acquisition engine optimization that we will continue to continue to drive. And then I think, you know, we touched on services, but I also think, you know, for us, what we're excited about is recapturing that under 6K customer is our obsession, bifurcating in terms of also making sure that we continue to really win with that above 6K customer who loves innovation, loves having the really big setups with all of the great benefits that only we can give them.

Um, so, uh, you know, we really are going to be doing a very heavy testing agenda through the rest of this year, uh, to capture that segment, but other than that, it really is just the assumptions is that I think Sean, you always, uh, phrase it the soggy place. And we will continue to focus on what we control drive the business. But Sean, I don't know anything else you want to add.

Yes, I'll just add in, to dovetail the question, thrown out earlier to Andrew about EBITDA and also what you put forth, Katie, around these macro pressures. This is where Lovesac is. We've been really holding our SG&A relatively flat. It's going to be flat, we believe, overall for a long time to come. We've built a business that can scale. It's not scaling at the moment in these macro pressures, to your point, but we intend to kind of innovate our way out of this and really get back to growth in measures that we can control. Yes. Through innovation, through product launches, through a better deployment of marketing capital in new ways to drive not just top line ultimately before the end of the year, but EBITDA and earnings going forward. And this is underpinning, of course, our launch into the new room in the year to follow.

Um, we're not waiting or expecting any kind of recovery in the macro as much as we sometimes see a glimmer of hope. Uh, this is the new normal, and our intention is to, again, manage our SG&A tightly and drive some growth through these product innovations and ultimately do a better job at returning value to shareholders in this way. And so we're really um landed on the business at this point and and uh expecting nothing from the macro environment.

Very helpful. Thank you.

Thank you. At this time, that concludes our question and answer session. I'll hand the floor back to management for closing comments.

So yes, thanks so much to all the investors and customers and the Lovesac team that continues to support this business and propels us to new heights. Appreciate your support.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. We thank you for your participation. Have a wonderful day.

This live transcript is auto-generated without human intervention or review.

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.