The Lovesac Company - Earnings Call - Q1 2026

Executive Summary

• Q1 FY26 net sales rose 4.3% to $138.4M with positive omni-channel comp sales (+2.8%) and SG&A leverage; gross margin compressed 60bps to 53.7% on higher promotional discounting offset by transportation cost reductions.
• Results were largely in line and modestly ahead of S&P Global consensus: revenue beat by ~$0.9M*, EPS beat by ~$0.06*, while EBITDA was slightly below consensus*. Management reaffirmed full-year FY26 guidance and issued Q2 outlook with expected sequential gross margin improvement drivers later in the year.
• Strategic catalysts: launch of EverCouch (doubling the TAM), strong early traction of the Reclining Seat, rebalanced customer acquisition engines toward showrooms; exit of Best Buy (one-time ~$2M SG&A hit in Q2) and continued Costco roadshow expansion.
• Balance sheet flexibility remains with $26.9M cash, $36M undrawn credit availability; inventory intentionally built ahead of tariff uncertainty with plans to reduce excess through Q2/Q3.

What Went Well and What Went Wrong

What Went Well

• Market share gains despite category headwinds; topline growth and SG&A leverage improved adjusted EBITDA and net loss YoY.
• Product innovation momentum: Reclining Seat “huge success” with strong attachment and units per transaction; EverCouch launched May 7 with positive early feedback and planned scale to ~100 showrooms this summer.
• Marketing and customer acquisition: social-first Recliner campaign generated 5B earned impressions; 25% web traffic increase; repeat purchases +20% YoY; improved CRM MyHub engagement.

What Went Wrong

• Gross margin down 60bps YoY to 53.7% due to higher promotions (-230bps product margin), partly offset by lower inbound (-130bps) and outbound/warehousing (-40bps) costs.
• Internet sales -8.9% YoY as mix intentionally skewed toward showrooms; “Other” channel -40.5% YoY on no barter transactions.
• Working capital pressure: net cash used in operating activities of $(41.4)M tied to payment timing on Q4 inventory build; basic and diluted loss per share of $(0.73).

Transcript

Speaker 1

Greetings. Welcome to Lovesac's first quarter fiscal 2026 earnings conference call. At this time, all participants will be in listen-only mode. The question-and-answer session will follow the formal presentation. If anyone today should require operator assistance, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, I'll turn the conference over to Caitlin Churchill, Investor Relations for Lovesac. Caitlin, you may begin.

Speaker 3

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

Our discussion today will include non-GAAP financial measures, including EBITDA and adjusted EBITDA. These non-GAAP measures should be considered in addition to, and not a substitute for, or in isolation from our GAAP results. A reconciliation of the most directly comparable GAAP financial measure to such non-GAAP financial measure has been provided as supplemental financial information in our press release. Now, I'd like to turn the call over to Shawn Nelson, Chief Executive Officer of The Lovesac Company. Shawn.

Speaker 0

Good morning, everyone, and thank you for joining us. I'll start by sharing a high-level overview of our first quarter results, provide an update on our design-for-life product platforms, and touch on our views for the remainder of the year before passing the discussion over to Mary Fox, our President. Mary will discuss our tailored customer acquisition engines and key growth enablers. Finally, Keith Siegner, our CFO, will review our financial results and provide more detail on our Q2 and FY2026 outlook. Turning to our first quarter, overall, we're pleased to have delivered results in line with our expectations and consistent with our plan to capitalize on secular initiatives and return to growth. For the first quarter, total net sales were $138.4 million, reflecting a year-over-year increase of 4.3%.

These results reflect market share gains despite the ongoing headwinds facing this category, which we estimate declined 5% for the comparable period. Total omnichannel comparable net sales increased 2.8% for the quarter, with additional growth coming from new and non-comp touchpoint contributions. Notably, our results reflect not only top-line growth but also SG&A leverage, as we've begun to reap the benefits of previous investments aimed to bolster core capabilities and accelerate our pace of product innovation. As a result, adjusted EBITDA, net loss, and net loss per common share all improved by double-digit percentages year over year. Our balance sheet also remains very healthy, with inventory levels and net cash providing substantial flexibility to weather tariff distractions, accelerate growth, and enhance returns on capital. Now for the exciting part: innovation on our design-for-life product platforms.

First, with a full quarter of a reclining seat in market, we can say that it has been a huge success. Backed by the launch of the Recline of Civilization marketing campaign mid-quarter, we've seen increases in new customer attachment coupled with healthy units per transaction, all while maintaining the strong repeat customer purchases we spoke of last quarter. Our customers love the recliner and see it as a tremendous value compared to competitor offerings, giving us optimism for continued meaningful contributions for many years to come. Second, the EverCouch, our first new product platform in over a decade. This elegant and sophisticated entry into the armchair, loveseat, and sofa category effectively doubles Lovesac's total addressable market. EverCouch is a true design-for-life product platform constructed to the highest standards out of the best materials. We believe that it is the best couch on the market, period.

EverCouch provides a solution for customers whose needs differ from those of a Sactionals customer, de-emphasizing modularity but with more of a focus on style, comfort, maintainability, and ease of use. It has a lower price point as a result of this engineering. EverCouch is beautiful, with washable covers, exchangeable arm styles, rapid shipping capabilities, and easy assembly with no tools, of course. Even better is that it leverages Lovesac's established brand equity in couches and comfort seating. After a six-week test-and-learn campaign in suburban Boston, we officially launched EverCouch on lovesac.com and in 27 showrooms on May 7th. Initial feedback has been very positive, and our showroom team members are excited. We have not yet turned on the marketing engine since we are refining the sales training based on our learnings, as well as building inventories to support a broader sales push.

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

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

It's only been two months since our last earnings call, and honestly, it's too early to make a clear call on any trend change from the data that we're seeing today. The category got a little better in March, weakened a little in April, and the quarter ended right up in line with the average trend since the fall, which is down mid-single digits. That remains our baseline planning for now, but we'll update you when things become more clear. What I can say is that we remain focused on what we can control. Just like I said earlier, we aim to leverage our secular growth initiatives to drive growth here at Lovesac. We grew in the fiscal first quarter, and as Keith will detail later, we forecast growth for the fiscal second quarter and for the full year, even without the category supporting us.

As for tariffs, we are actively working to mitigate the potential impact, and we believe we can leverage all of the available tools at our disposal to manage that impact. Mary will provide more details momentarily, but given our unique model with high product margins, geographic redundancy, and strong vendor relationships, we believe we can cover the impact within our existing full-year guidance, barring any new wildcard scenarios, of course. In summary, we are committed to delivering on our objectives, leveraging Lovesac's innovative product offerings, strong customer relationships, and operational excellence to grow irrespective of the category in the near term while maintaining clarity around long-term thinking and value creation. Let me be clear. We believe that when the replacement cycle for comfort seating ramps up and housing turnover re-accelerates, we will be ready to capitalize on it immediately.

We are thrilled to have our new Chief Marketing Officer, Heidi Cooley, now on board. Heidi is already working closely with our teams, developing plans to support our ambition to be the most loved home brand in America by 2030 while driving profitable sales growth simultaneously. We look forward to sharing more in the future. Finally, I must thank our entire Lovesac family for their adaptability, their creativity, and commitment to this mission. Launching new product platforms requires extra effort from every single team member, from our touchpoints to HQ, and that's in addition to navigating tariff uncertainty and a challenging category, to say the least. Every one of you is essential. You're reshaping the home category with products that are designed for life and thereby creating long-term value for all stakeholders. With that, I'll hand it over to Mary to cover our strategic priorities and progress in more detail.

Mary?

Speaker 2

Thank you, Shawn, and good morning, everyone. I'll now focus on our second superpower, our customer acquisition engines that are uniquely tailored to each of our design-for-life platforms, as well as our growth enablers, including our advantage supply chain. Beginning with customer acquisition engines, our superpower really lies in our ability to leverage different mixes of brand and performance marketing, digital configuration through lovesac.com, incredible showroom experiences, and efficient partnerships to optimally affect by product platform. Done wisely, we can efficiently generate customer awareness, convert that awareness into customers, and ultimately build long-term relationships and brand love. Before I dive into each of these components, I'd like to start by highlighting first quarter's growth as an example of the advantage Lovesac derives from our unique mix of customer acquisition engine options.

We were pleased to see the return to growth in the business throughout quarter one, with strong quote conversion in our showrooms in particular. We made a conscious decision to lean into our showrooms marginally at the expense of our internet business for two reasons. First, we leveraged the strength of our product demos to drive appreciation for new innovations such as the recliner. Second, similar to the end of the fourth quarter, we were able to combat aggressive discounting by competitors through the continued effectiveness of highly relevant personalized offers. We continually refine our mix, letting data drive us towards optimal performance. With that backdrop, let's spend a few moments on each of the components, starting with brand and performance marketing. As Shawn shared, we have tremendous momentum with one of our newest innovations, the reclining seat, supported by a Recline of Civilization campaign in quarter one.

It was developed to be a social-first campaign, leveraging influencers and content creators to create a cultural moment to exponentially grow new customer awareness, and it worked. The campaign generated 5 billion earned impressions and over 600% increase in engagement across all digital channels and almost 700 PR articles. In quarter one, we also adjusted our marketing allocations, enhancing our top-of-funnel awareness program, especially through search and social media, to balance that with mid and lower-funnel conversion tactics. This also worked, having produced a strong 25% increase in traffic to the website as customers start their discovery about our products, an investment we believe will pay off over time as that awareness matures. We'll continue to test and learn throughout the funnel and in particular on new awareness tactics as we concentrate on building the Lovesac brand and introducing new innovations.

Building on the first quarter's momentum with new customers, in quarter two, we launched our latest television commercial featuring our Recliner in action. Be on the watch for more of these cultural moments in the upcoming months for PillowSac Accent Chair Frame, StealthTech, and our newly launched platform, EverCouch, to name just a few. CTV also continues to be a strong lever that we plan to optimize over the course of the year, with efficiencies in linear TV offsetting some of the inflationary pressure in search. Second is our digital configurations and how we bring Lovesac to life online. As we continue to invest in optimizing the digital experience, both in technology and improving the customer journey, we're seeing return on our investment at all phases of our flywheel.

Our re-platforming to Adobe Edge has helped us improve our SEO, bringing qualified visitors to the website and allowing us to reinvest marketing spend with organic search visits to the website, growing almost 40% year over year in quarter one. Our customer re-engagement center, MyHub, is being progressively improved, always with the goal of being a frictionless omnichannel experience for new and repeat purchases. In quarter one, repeat purchases increased over 20% to last year, with over 40% more customers accessing their accounts. Perhaps more importantly, these platform investments enable us to launch new products and platforms effectively. I do not mean only under the skin, but rather customer-facing. EverCouch was the impetus for the newly designed homepage and the updated website navigation. As of May, customers can now more quickly and intuitively find the categories and specific products they're looking for, with a distinction between sectionals, couches, and chairs.

Early indicators show a more engaged customer converting at a higher rate with improved customer satisfaction overall. We will learn more as we ramp up investment in the customer acquisition engines throughout this year, including our formal EverCouch marketing campaign launch in the second half of this year. Third is our showroom experience, the physical brand amplifiers of our design-for-life products, the linchpin of our omnichannel model with the product platforms conveniently accessible in real life. Just a few weeks ago, we evolved our product demo to accommodate the EverCouch. This continued evolution of our signature selling process allows our customers to experience all of the features and the benefits of our product platforms and drives the conversion improvements I shared earlier.

Shawn and I spend a lot of time in the field listening to our teams, and we were just together in the field fine-tuning the demo to incorporate all the great feedback from our soft launch. While any showroom can sell EverCouch already, we plan to scale physical inclusion of an EverCouch product to approximately 100 showrooms later this summer, allowing every major DMA to showcase this platform. I'd also like to highlight a recently launched update to our performance-based compensation model for our field teams, now inclusive of a blend of individualized metrics in addition to the long-standing company-wide metrics. We're already seeing benefits coming through in quarter one, and it was just great to see how motivated our teams are to drive their business and the brand potential. Finally, complementing our showrooms is our partnership model, including Costco and Best Buy.

We recently completed a detailed strategic planning review that considered the optimization of our customer acquisition engine options. Coming out of this review, we made the decision to end our Best Buy partnership after five successful years together. When we began this partnership in 2020, Lovesac had less than 100 showrooms across the country, and Best Buy helped us to quickly expand distribution points and establish credibility in home audio and tech, all while we also helped reinforce their leadership in tech-enabled product categories. Fast forward five years, and our showroom footprint has tripled, providing convenient accessibility for our current and future customers to experience Lovesac and Stealth Tech. We have immense confidence in our ability to provide an excellent customer experience and deliver more profitable growth through our own digital and showroom ecosystem, as well as with our Costco partnership.

In conjunction with our decision, we estimate booking a non-recurring charge of approximately $2 million in the second quarter, partially offset by improved profitability in the second half. Regarding Costco, it represents the sizable share of our partnership model. With Costco's more than 120 million members and strong traffic, our roadshow model allows us to activate pop-ups in its clubs while owning 100% of the customer data and relationship. We'll continue to expand our assortment with Costco this year, and we plan a 15% increase in roadshows over last year, further demonstrating our unique ability to sell premium products in approximately 100 sq ft. When combined, these four elements of our customer acquisition engines create an unmatched customer experience that drives brand love. We're going to reinforce our brand experience and customer satisfaction further by launching customer-facing services.

We are excited to share that Love to buy Lovesac, our new resale platform, is officially live in Texas. This first state launch marks a significant step in our long-term commitment to sustainability, to circularity, and innovation in home furnishings. By giving pre-loved products a second life, we're not just reducing waste. We are reinforcing our promise to design products that are built to last, designed to evolve and be loved again. This is also a critical foundation for us to launch trade-in services, which we are planning for later this year, which will help unlock both trade-in and trade-up for our new and loyal customers. This represents an important milestone in our journey towards a more responsible and resilient future for Lovesac. Key to us sustaining all of this profitable growth over the long term are our growth enablers.

I'll just briefly mention our supply chain, a critical component of our financial success and one built for scalability in advance of new product and platform introductions. Over the past few years, we have transformed our network strategy and carrier models, including implementation of both transportation and order management systems. We are now well underway with our work on optimizing our warehouse and outbound logistics programs, consistent with what we've shared previously. Regarding tariffs, as we mentioned back in April, we have four key levers to help mitigate our exposure, and we have made significant progress on each. The first is focused on working with our long-term vendors for concessions, and we have received support from every key vendor. The second is the work to further diversify manufacturing away from China.

We remain on track to be about 13% for the full fiscal year, with an exit rate substantially lower than that. Third, given the strength of our brand and the fact that our last price increase was a narrow one in 2023, we executed some surgical and strategic price increases last month and are pleased with the performance since being implemented. We feel very good about our value proposition, as many other brands have taken multiple increases in the past two years. The final initiative was looking at other cost efficiencies, and the teams have continued to drive this work. We're currently leveraging all of these levers at differing degrees, with flexibility to refine them further depending on the final outcomes of tariff implementations.

Combined with the flexibility gained by building higher than normal inventory ahead of this potential, we feel that our four-pronged approach should mitigate the majority of the current tariff pressure. With that, I will hand over to Keith to share more on our financial performance and outlook. Keith. Thanks, Mary. Let's jump right into a quick review of first quarter, followed by our outlook for the rest of fiscal 2026. As we begin with performance metrics, please note that all references to the first quarter refer to fiscal 2026 unless otherwise noted. Net sales increased $5.8 million, or 4.3%, to $138.4 million in the first quarter compared to the prior year period.

Showroom net sales increased $14.9 million, or 18.2%, to $96.5 million in the first quarter compared to the prior year period, driven by an increase of 2.8% in omnichannel comparable net sales and the net addition of 21 new showrooms. Internet net sales decreased $3.3 million, or 8.9%, to $33.3 million in the first quarter compared to the prior year period. Other net sales, which include pop-up shop, shop-in-shop, and open box inventory transactions, decreased $5.8 million, or 40.5%, to $8.6 million in the first quarter compared to the prior year period. The decrease was primarily attributable to the company's decision not to engage in any barter transactions during the current period. By product category in the first quarter, our Sactionals net sales increased 4.5%, Sacs net sales increased 6.4%, and our other net sales, which includes decorative pillows, blankets, and accessories, decreased 17.1% over the prior year period.

Gross margin decreased 60 basis points to 53.7% of net sales in the first quarter of fiscal 2026 versus 54.3% in the prior year period, primarily driven by a decrease of 230 basis points in product margin driven by higher promotional discounting, partially offset by decreases of 130 basis points in inbound transportation costs and 40 basis points in outbound transportation and warehousing costs. SG&A expenses as a percent of net sales was 48.5% in the first quarter of fiscal 2026 versus 51.6% in the prior year period. The decreased percentage is primarily related to lower professional fees, credit card fees, computer expense, and other overhead costs and higher net sales.

The decrease in selling, general, and administrative expense dollars was primarily related to decreases of $3.8 million in professional fees and insurance matters, $0.9 million in credit card fees, $0.7 million in computer expense, and $0.3 million in other overhead costs, partially offset by increases of $2.2 million in payroll, $1.3 million in equity-based compensation, and $0.9 million in rent. Rent increased $0.9 million related to $1 million of increase in rent expense from our net addition of 21 showrooms, partially offset by a $0.1 million reduction in percentage rent. We estimate non-recurring incremental fees associated with the restatement of prior period financials were approximately $0.6 million in the first quarter. Advertising and marketing expenses increased $0.6 million, or 3.3%, to $18.6 million for the first quarter compared to the prior year period.

Advertising and marketing expenses remained relatively flat at 13.4% of net sales in the first quarter as compared to 13.6% of net sales in the prior year period. Operating loss for the quarter was $15 million compared to $17.9 million in the first quarter of last year, driven by the factors we just discussed. Before we turn our attention to net loss, net loss per common share, and adjusted EBITDA, please refer to the terminology and reconciliation between each of our adjusted metrics and the most directly comparable GAAP measurements in our earnings release issued earlier this morning. Net loss for the quarter was $10.8 million, or negative $0.73 per common share, compared to net loss of $13 million, or negative $0.83 per common share in the prior year period.

During the first quarter, we recorded an income tax benefit of $3.8 million as compared to $4.2 million in the prior year period. Adjusted EBITDA loss for the quarter was $8.4 million as compared to $10.3 million in the prior year period. Turning to our balance sheet, we ended the first quarter with a healthy balance sheet to provide substantial flexibility for Lovesac to invest in growth to enhance long-term value creation for shareholders. We reported $26.9 million in cash and cash equivalents while retaining $36 million in committed availability with no borrowings on our recently amended credit facility. First, our total merchandise inventory levels are in line with our projections, somewhat higher than necessary given our intentional build ahead of tariff uncertainty.

We expect to begin reducing excess inventory levels in the second quarter, which we estimate will help offset working capital requirements for building EverCouch weeks of stock through the second half of the fiscal year. We feel very good about both the quality and quantity of our inventory and our ability to maintain industry-leading in-stock positions and delivery times. Second, consistent with our strategy to allocate excess capital opportunistically with a focus on long-term value creation and enhancing returns on capital, during the quarter, we repurchased approximately 306,000 shares of our common stock at an average price of $19.57 for approximately $6 million. This leaves approximately $14.1 million remaining under our existing share repurchase authorization. Please refer to our earnings press release for other details on our first quarter financial performance. Now for our outlook.

As Shawn mentioned, while there is weekly and monthly variation, such as a better March but a weaker April, the underlying category trends generally seem to revert toward negative mid-single digits on average for the last seven or eight months. As such, we're prudently maintaining our assumption and our plans for a 5% full-year category decline. Additionally, we have many secular tailwinds helping counter that category outlook and providing optimism. These range from annualization to fiscal 2025 major product launches, a recent launch of EverCouch, a reboot of our marketing strategies under new leadership, growth in physical showrooms, new tools for relationship management, and more. For the full year of fiscal 2026, we are reaffirming our guidance. Please note that, as Mary outlined, we have many arrows in our quiver with respect to managing tariff impacts.

We're actively pursuing some combination of all of those four options that she outlined, and we believe we can manage tariff impacts within the full-year ranges. That said, the exact amount of each mitigation option we deploy will depend on the ultimate specific tariffs implemented. As you think about the full-year guidance, there is potential for an upward bias to net sales and a downward bias to gross margin, getting us to the same adjusted EBITDA, net income, and diluted EPS levels, again, depending on the ultimate tariff outcomes. Please also note that both our full-year and second quarter guidance metrics include the impact of the write-off associated with the ending of the relationship with Best Buy, which we currently estimate to be approximately $2 million pre-tax.

This non-recurring one-time expense increases SG&A and reduces net income and EPS, though does not impact adjusted EBITDA on our guidance given its non-recurring nature. Specifically for the full year, we estimate net sales of $700 million-$750 million. We expect adjusted EBITDA between $48 million and $60 million. This includes gross margins of approximately 59%, advertising and marketing of approximately 12.5% as a percent of net sales, and SG&A of approximately 41% as a percent of net sales. We estimate net income to be between $13 million and $22 million. We estimate diluted income per common share in the range of $0.80-$1.36 and approximately 16.3 million estimated diluted weighted average shares outstanding. For the fiscal second quarter, we estimate net sales of $157 million-$166 million, representing low single-digit revenue growth at the midpoint and fully representative of all our near-term plans for tariff mitigation.

We expect adjusted EBITDA loss between $2 million and $7 million. This includes gross margins of approximately 55%-56%, advertising and marketing of approximately 15% as a percent of net sales, and SG&A of approximately 47% as a percent of net sales. We estimate net loss to be $8 million-$12 million. We estimate basic loss per common share to be $0.58-$0.83, with 14.6 million weighted average shares outstanding. In summary, stabilization of the category and an eventual return to category growth are ahead of us, even if that timing remains unclear at the moment. While in this category fog, we are balancing prudence and efficiency with our beliefs that it's essential to stay focused on the big picture. That's the massive long-term opportunity for tremendous value creation for all Lovesac stakeholders.

We are building the Lovesac brand and investing in new product innovation that spans style, function, and 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. If you'd like to ask a question at this time, please press Star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press Star 2 if you'd like to withdraw your question from the queue. For those that are using speaker equipment, please pick up your handset before pressing the Star keys. One moment, please, while we poll for questions. Thank you. Our first question today is from the line of Michael Baker with D.A. Davidson & Co. Please proceed with your questions. Okay. Thanks.

Wanted to ask you about the promotional environment. You referred to gross margins being a little bit less than expected because of what you're seeing promotionally. If you could talk about what you're seeing from competitors. Correct me if I'm wrong, but I think the gross margin was lower than expected in the first quarter relative to the guidance you gave last quarter, yet you've maintained the full-year gross margin outlook. What is, I guess, better or what gets better later in the year in the gross margin such that you'll be in line? Thanks. Hey, Mike. It's Mary. I'll take the first part just around the promotional environment, and then I'll let Keith talk a little bit more on the gross margins.

I think very similar to what we had shared back in April, we still see discount levels for the category to be incredibly high. They still did not come down from the peak, and they are up year over year by at least kind of 400 basis points. We are seeing many competitors at kind of the 40-45%. I think as we have always shared in the past, as long as we have a 3 in front of our key promotions at those tentpole moments, we see a lot of success. I think the second thing as I had shared is that we are also getting a lot sharper around the personalized promotions that really allow us to understand kind of what is on our customers' minds, what they are looking to do, drive them to the showrooms so they get to do a demo.

That way, we actually get to really unveil a lot more around the innovation we have and see quite a bit of trade-off. We have planned for within the guidance that kind of continued competitive environment from a promotions point of view. I will hand to Keith to talk a bit more about the gross margin. Sure thing. Thanks. Mike, really what it boils down to is the timing of all those different levers that Mary and I talked about just a couple of minutes ago. When you think about, for example, what our geographic reliance is on China, right? Starts off much higher than it ends the year, averaging to the 13%. There have long been tariffs on China, so that piece mitigates. Another one is vendor contributions. We have been working with them.

That started the year off with none, but as the tariff stuff has come into the picture, we've worked with them on plans that develop through the year. Another one is pricing. We've been doing a lot of work, as Mary mentioned, thinking through our relative pricing positioning within the market and ways that we could put ourselves into a proper position where the value proposition that we represent remains extremely strong and the value is really compelling to those customers. That plays out through the year and potentially even at greater levels depending on where those tariffs end up. When we think through what that total planning is, you get the cost associated with all of this stuff first before you get the benefit, which kind of folds into the mix over the course of the year.

There is a lot behind this that builds up to this, but we feel very good about that. Hopefully, that makes some sense. It does. Thanks. That does make sense. If I could ask one more, just if possible, any more color on EverCouch, which has been in stores for five weeks. I think the language you said is feedback has been very positive, but I'm wondering if you're willing to share anything on sales or anything surprising in terms of what the customers are telling you about that product. Yeah. Thank you. This is Shawn. It's too early to comment too much on sales other than we're really pleased with it and our internal goals are being exceeded. We feel really good about the product.

I think the main headline with it, because it's only been a few weeks and obviously in sort of a test phase and only a few showrooms physically, is that it's a whole new platform introduction. I know it seems like a strange thing for a company that's kind of famous for couches. Craftly speaking, we actually only sell sectionals heretofore. And to have this sofa, loveseat, chair solution that operates very differently than sectionals, which is, of course, a product we've been selling for a couple of decades, and have it come in with zero quality issues, no concerns on construction design. Because this is a platform we'll sell against for the next few decades as we do things at Lovesac. Too early to share much color other than to say it's well received. It's absolutely selling in real time.

It's a part of our product mix now. It's going to be for a long time. We're really excited about how it changes the profile of what's offered in our showrooms. What I mean by that is when we do our own research, as you know, we're a research-led organization as opposed to a merchandiser-led organization. Style and comfort are the main table stakes for comfort seating. Sectionals are fantastic, but obviously have their limitations in terms of what's offered to the customer in a style profile. EverCouch radically changes that, and we're really pleased with the results. We'll have a lot more data to share on the next call, I'm sure. Great. Fair enough. Thank you. Thank you. The next questions are from the line of Maria Ripps with Canaccord Genuity. Please proceed with your questions. Great.

Good morning, and thanks for taking my questions. First, could you maybe expand on your decision to exit your partnership with Best Buy? Does that mean that you'll be sort of relying more on Costco to grow sort of your presence outside of your showrooms? Maybe more broadly, can you talk about your sort of broader approach to distribution partnerships now that you have sort of a much wider sort of physical presence? Yeah. I'll start, and Mary will chime in as well. We are really excited about new opportunities for new channels for Lovesac. As we broaden our product offering, those opportunities are more available to us than ever. We are in partnership-making mode. It is a really exciting time.

The EverCouch especially opens up opportunities for us given their logistical simplicity to Sactionals in many respects, even back through things like POS considerations, delivery considerations, etc. We are really also excited to continue to expand the Costco relationship both through new products as well as new sales opportunities. This will be the next year and beyond will be a time of testing and learning and great diversification, not just from a product perspective, but from a channel perspective for Lovesac. Meanwhile, we are really grateful for the Best Buy partnership that we just wrapped up, and it was a fantastic way for us to get exposure at a time when we had very few showrooms.

It was a fast path to more touchpoints and especially important to launch the Stealth Tech product in a way that really bought Lovesac a ton of credibility in the home audio space. Stealth Tech is a mainstay of our product offering and will become even more important as we branch into new categories and new rooms, as we've discussed. We feel like we got everything we needed out of that relationship. At the same time, we have a great relationship with Best Buy and the team there. It is actually, in our long history, our second foray in and out of Best Buy at times that were useful to both brands. Life is long, and Lovesac is meant to be here for decades, and we look forward to continuing to cultivate partnerships out there as they're useful to the brand and our strategy. Yeah.

I think, Maria, just to add, I think we're so clear and sharp in our plan. I think with all the analysis we did, as you think back five years ago with 91 showrooms and we now treble that number, it was just a really clear opportunity for us. You've got 80% of the Best Buy locations are within a 25-mile radius of our showrooms, and we're going to continue expanding the showrooms as we looked at both today and the future.

It was very clear that for us to be able to really bring the brand to life, the new platform, obviously with EverCouch, that really through our showrooms and the Costco partnership, it was really the best way for us both as engaging with customers, but also from a profitability point of view because they are obviously expensive to staff and operate with lower volumes in our showrooms. We have immense confidence. I think one of the big advantages is we do have all the data on our customers, so we're able to target any customers that have already bought at Best Buy for Lovesac. Obviously, that CRM engine will be very powerful for us as well as local targeting to let customers know in terms of where their nearest showroom is.

Obviously, the website that we continue to get sharper and better, and we shared some of that earlier, just enables that omnichannel seamless experience in such a great way. I only think it's the confidence of our plan that actually made it very clear now was the right time to make that decision. As Shawn said, we're very grateful to Best Buy and feel very good about the plan going forward, and particularly the partnership with Costco. They were just with us in the office just a week or so ago, really looking at our plans going forward in the future and really partnering together. I feel good there. Got it. That's very helpful. Thank you.

Secondly, I just wanted to ask about tariffs in China and how does this recent agreement between the recent framework between the U.S. and China influence the likelihood that you will exit China altogether? If you're still considering that, how should we think about a possible timeline for that? Yeah. Look, we have a long and storied relationship with our manufacturers in Asia, China in particular, of course. There's no question that the current tariff situation there is really not viable. I think that is, I read that, I think that's the point of the tariff situation there, at least for consumer companies like ours. We are grateful to be already diversified out of China.

For us, we can see a path even in the nearest future to essentially manufacture nothing in China and get our manufacturing flow completely out of there. We've mostly done that in real time now. We have full redundancy in other geographies spread throughout Asia and now increasingly moving toward America. Our point of view is actually not even tariff-driven. Our point of view at Lovesac, just to remind those who come in and out of following us, is to manufacture closer to the users of the product. We want to be taking resources over shorter distances, turning them into finished product more sustainably, and shipping back to customers over shorter distances. We are driven by that vision regardless of what happens with tariffs. We are on a path to do exactly that.

In fact, as we revamp even our current product line, as is happening behind the scenes, and explore manufacturing through the lens that I just offered, we believe we have a path to more manufacturing closer to the consumer. Meanwhile, as I said, we can be completely out of China and feel very confident in our ability to maintain a contiguous supply chain with no breaks or anything like that. In the nearest term, we have a few items that we're still manufacturing there just in a transition mode, but it's diminishing quickly toward zero. Got it. Thank you so much, Shawn. Thank you, Mary. Our next questions are from the line of Brian Nagel with Oppenheimer. Please proceed with your questions. Hi. Good morning. Good morning. Questions.

First off, I mean, recognizing that we're in a very fluid environment, but as you talk about some of the initial successes with these new products, how should we, to what extent is, I guess you would use the word upside, upside from these new products baked into the guidance for the balance of the fiscal year? I'll kick this one off. The point of our guidance in this particular, let's call it cloudy macro period, is to not overly burden any one particular item with some heroic assumption. Like I talked about in my remarks earlier, we have a lot of things working for us. To be totally transparent, we can achieve the full year guidance with the core products basically being flat. We don't really need to see growth in the core products, and we can hit those levels.

Said differently, if the new products do very well, we could even see declines in the core products. There are a lot of different ways we can get there. That is an essential element to how we are running the business during this period and keeping ourselves in a position of strength, keeping the business healthy, living to fight another day. We are ready to go as soon as that housing turnover reaccelerates, the replacement cycle picks up, all that stuff Shawn talked about. Our whole goal here is to be pragmatic and objective managers of this business, maintaining profitability, cash flow, strength, and growth, but retaining the upside for the macro as well. We are ready for all that. It is a balanced approach. Many different scenarios can get us to the full year guidance across existing and new products. If the macro picks up, hopefully we all do even better.

That's helpful, Keith. I appreciate it. My second question, I guess, is bigger picture, maybe even more philosophical. But as we're thinking about tariffs and I think, Mary, you mentioned maybe some price adjustments you've taken. How do you think about the price adjustments needed to potentially offset, at least in part, tariffs versus what remains a promotional backdrop within the space? Yeah. No, thank you, Brian. I think the first thing, we're always looking at all the levers. I think what is clear to us is that people haven't stepped down in terms of on promotions. They're in the 40s, 50s, 60s. We're seeing top sellers going into clearance and then coming back out again. We know we must have that three in front of us, and we continue to test and keep on learning. I think we're very clear there.

I think then we think about from a pricing point of view. For us, given the strength of the brand, the last price increase we did was just a narrow one back in 2023. When we really step back and look at our overall price positioning, we look at price, we look at quality, we look at our unique features and benefits, which are way superior to so many others. We also saw many other brands taking multiple price increases in the last few years as well as just very recently. We saw the opportunities for some surgical price increases. We'll continue to assess it. We're always very focused on making sure we have that competitive price positioning and most of all, very, very strong value. You know because we've shared before, 40% of our customers don't even cross-shop us with anyone.

The strengths of the brand, the continued investments, obviously with Heidi coming on board in the brand, are paying off because you obviously see that people value the brand just beyond price. It is a key advantage for us. We'll continue to review over time. We've baked in what we know about tariffs at the moment. As you know, that's just one of the levers that we can take. We're very happy with the great vendor partnerships. I think the last piece is our structurally higher gross margins than many of our competitors means that the effective price increase that we need to take is relatively smaller to them. I'm very grateful our team surgically reviews this all the time. As you know, we don't take MSRP price increases very often. They're very strategic to us.

More to come, but we feel confident in being able to use that lever as needed. Thank you, Mary. Appreciate it. Thanks, Brian. Our next question is from the line of Eric Delaunier with Craig Allen. Please proceed with your questions. Great. Thank you for taking my questions. First one on me, just on EverCouch. You're turning on the marketing engine. Can you just expand a bit on what you expect that to look like? Should we expect pretty strong marketing investment behind this launch sort of out of the gate, or would this be a bit more gradual over time? I think you mentioned you plan to expand EverCouch distribution to 100 showrooms in the coming months. Correct me if I'm wrong there, but then just kind of help us understand how you're thinking about further distribution gains after that 100.

Thank you. Yeah. Thank you for the question. Yes, I think first for us, as we shared, we're in 27 showrooms at the moment. A big part of that was really making sure we really take the learnings around the demo experience. We really perfect that because as Shawn always shares, we want and intend to sell this product for many, many years to come. I think that first step is very important to us. You're right. Later in the summer, we'll expand out to a full 100 showrooms, and then the teams have plans kind of beyond that. I think I feel very good on that. Obviously, we have it nationally available on the website.

As I had shared earlier, we've reconfigured and redesigned the website both in terms of homepage as well as all the navigation and seeing great results from that. In terms of from a marketing engine point of view, we will start throttling that up later in the summer through to the back end of the year. We will build that over time. We have the teams with a great campaign launch as well as many other levers that we'll take within the marketing engine. When we next talk in September for the next round of earnings, obviously, we'll have more news to share with you. I think the key thing, as Shawn shared, is the initial feedback is people love the product. They love the style. They love the comfort.

Our teams are super excited, which they often are the greatest level of feedback for us around what customers want and what they like. Look forward to sharing more with you. All right. Great. That is very helpful. Then just one more from me, probably for Keith here. Just wondering if you can help us understand a bit more how you see any changes in working capital throughout the rest of the year. Obviously, kind of a use of cash this quarter. You gave us some inventory highlights. If you could just walk through a bit more of an analysis on expected changes in working capital for the rest of the year, that would be very helpful. Thank you. Yeah. Sure thing. It is actually pretty straightforward through the rest of the year.

Given we had the big build in the fourth quarter on inventory and given the great payment terms we have with most of our vendors, the payment for that inventory build occurred in the first quarter. You saw that flow through dramatically reduce sequentially accounts payable, accrued expenses, and lower cash. That puts us in a good position. Even with some build into the second half for EverCouch, we should probably end up at slightly lower. Again, take all this as estimates, but end up with slightly lower inventory than right now by the end of the year, even with the addition of the EverCouch. Aside from that, CapEx, we're still sitting around $25 million for the full year as our current estimate. Everything else should be relatively straightforward. We're not a heavy working capital business given we don't really have accounts receivable.

Our customers pay really quickly. So it should be relatively simple other than that nuance within the inventory we just discussed. Awesome. It's very helpful. Thank you for taking my questions. The next questions are from the line of Matt Koranda with ROTH Capital Partners. Please proceed with your questions. Hey, guys. Good morning. Just wanted to make sure I understood on the gross margin commentary that you gave. If we selectively took price last month and we likely have non-tariff impacted inventory we're selling in the second quarter, I guess what in particular is the headwind to the gross margin? Is it a product mix shift or promotional headwind that we're factoring in? And then just for the rest of the year, Keith, maybe for the implied improvement, I guess we'll be probably selling some tariff-impacted product, but there's some pricing benefit.

Maybe you can help us understand a little bit more about the positive drivers there in the second half. Yeah. A couple of things. I mean, it really is just nuance around what I talked about before. We have more tariff-related costs in the inventory in the quarter into Q than we will later in the year because there is more China, right? China has, even before with the inventory they brought in ahead of all the April 2nd stuff, had tariff on it, whereas a bunch of the other countries did not. More reliance on China is number one. Number two, we are not going to get full benefit of vendor concessions in the second quarter, which ramps through the year. Number three, the price increase was put in place during the quarter, but that does not mean that is the only price increase we will take this year.

It's just a price increase taken this year. There could be more. You can see how that could flow through. Another one is with the launch of EverCouch. This is a brand new product platform for us, and there are different approaches we could take to headline discounting on it, especially on something brand new like this with early adoption excitement that exists out there. Our initial goal would be to have less heavy promotional cadence on EverCouch. As that ramps up, there's an effect there. There are quite a few things that drive this, and we're happy to get into more of the specifics offline. 2Q sort of is the perfect storm of more of the cost with less of the benefits. I didn't mention general efficiency efforts and other things like that that we're working on as well.

The benefits from things like, for example, Mary mentioned before, outbound logistics and warehousing efforts that we have that are kicking in as the year progresses. All of those different factors just kind of work around this idea of a perfect storm in 2Q. Okay. Very clear. Appreciate that, Keith. And then maybe just curious of Mary if you could share anything on Memorial Day performance as a barometer for the second quarter demand trend. And then maybe also just curious about sort of how the pricing actions that you guys have put in place thus far have been received and how that might inform sort of future pricing action. Yeah. No, thank you, Matt. Yeah. I mean, obviously, as Keith shared, our guidance for quarter two points to our underlying performance, where we're growing, gaining market share.

This obviously factors in Memorial Day performance, which we were happy with. This obviously is building on quarter one, where we're gaining share. We feel good. Obviously, we're only partway through the quarter. We have our next big temporal moment ahead with us with the July the 4th event. As we continue to see, we've seen people excited by innovation, whether it be PillowSac Accent Chair, the Recliner, and all the other things that we have shared. Very similar dynamics, still choppy, as Shawn has shared in some of the category dynamics, but feel good on Memorial Day. I appreciate the teams are really sharpening the communications, testing even more around kind of different promo tactics, different communication tactics. More to come, obviously. We need to get through the July the 4th event.

Overall, the guidance indicates growth for the quarter, which we feel good about. I think then in terms of your question on the pricing actions, we took that surgically in the assortment where we really identified where there were opportunities, looking both obviously in the benchmarking competitively. We are always very focused on having a very strong value proposition. The teams did a great job, great communication out to the field teams. Since then, feel really good in terms of on the execution for that. It just goes back to the strengths of the brand. As I shared earlier, so many customers just come to us because their friends have told them this is just a great product or they have tried it out at their friend's home.

The strength of the brand obviously really helps us ensure that we get the right balance of the value proposition. More to come as we go through the year. Obviously, the latest news on China flourished yesterday, kind of baked into our guidance. Hopeful that we can see some relief at some point later this year maybe too. I appreciate all the detail, guys. I'll leave it there. Yeah. Thanks, Matt. Thank you. Our final question is from the line of Thomas Forte with Maxim Group. Please proceed with your questions. Great. Thanks. Shawn, Mary, Keith, congrats on the quarter. I'm going to ask both my questions at once since the call is getting long here. Can you talk about new products bringing new customers to the brand, the PillowSac Accent Chair, Recliner, and while very early, the EverCouch?

And then my second question, when I think about Best Buy, it came around the initial launch of Stealth Tech. So Shawn, what gives you confidence in your ability to sell consumer electronics-type products in your physical showrooms and Costco? Thank you. Yeah. Sorry, the first half of the question, Tom, I broke up for once. The ability of the new products to bring new customers to the brand, PillowSac Accent Chair, the Recliner, and while very early, the EverCouch. Yeah. Thank you. Yeah. This is obviously the point of these launches and our strategy and product to begin more broadly is to bring new customers to the brand and especially be able to convert more effectively.

If we back up and look at where Lovesac has had success, Lovesac had Sactionals for a long time and had some success and grew before we turned on the marketing machine that you see today. One of the most important pieces of that marketing machine for us was simply mass advertising, whether it be TV, especially obviously now that's transitioned to over-the-top and digital, social, etc. We're reaching really the entire country. We have a focus on our core demographic, typically more affluent households between 35 and 45 experiencing household formation, that sort of thing. As strong as Sactionals are, as what we think the best-selling sectional in the United States of America, there are many reasons that people choose not to buy. These new products have been developed to mitigate those reasons.

We know specifically what those are through our ongoing research with our customers. Taking them one at a time, let's work backward. The EverCouch has a markedly different profile and style and scale to Sactionals. In fact, we're very heartened by how it's performing in more urban markets where spaces are just smaller. It still has the advantages of getting up elevators and through staircases and shipping directly to the home and that sort of thing. That's a perfect example of how we're able to not just reach new customers, but importantly, convert new customers more effectively that were turning us down before. At the same time, it's a photographic game. It's an image-driven game today, especially on social media.

The EverCouch provides us kind of a whole new profile in terms of the way we're shooting it, photography-wise, style-wise, the types of influencers we'll use to reach people. In that way, again, reach more people, reach new people, people that are suited for that product especially based on lots of different points of data. The Recliner, again, this has been a quarter of the sectional category motion, and we've just been locked out of it. People would walk into our showroom and say, "Do you have a Recliner? We've heard of the Lovesac brand. We see your ad. It's really cool. Do you have a Recliner?" Our answer is no, and we're off their shopping list. That's now changed and has become a very important part of the mix. Obviously, it's another really stealthy invention for us.

It looks exactly like a typical Lovesac seat that people might have seen or owned for a long time, but all of a sudden, it comes to life and moves, and that makes for great imagery, makes for great motion imagery, performs very well on social media, and helps us reach new people and open up the quarter of that category that we were not participating in before. This is the reason Lovesac's growing. At the end of the day, this category has been under duress now for three years straight. While it's not our most banner growth years, it would be a really difficult path to growth were it not for these innovations. The PillowSac Chair frame has just been crushing it on social media. It's really just helped us reach a lot of people through its slightly viral launch onto the scene.

It's propelled PillowSac to be our best-selling sack. It's a really exciting product as well. Meanwhile, I'll wrap up with Stealth. You asked what gives us confidence to sell these to our own showrooms. It is amazing to us because it was controversial to print Lovesac on the side of a soundbar. You're not seeing, I don't know, Samsung, Sony. You're seeing the name Lovesac as the prominent name on the side of that soundbar for Stealth Tech, which is the only piece of it you see because the rest of it is hidden away right inside of our sectionals, etc. We see no resistance when we do the research, when we talk to customers, when we talk anecdotally to our showroom managers who are interfacing with people day to day.

We are very confident in our ability to become a major player in home audio and beyond home audio. In technology in general, we have Stealth Tech innovations coming that are not home audio. We will, again, hide technology away in the space that we provide on, around, underneath your couch and other products. We see no resistance in our own showrooms. While Best Buy was extremely useful in helping us establish that credibility, I think based on, to loop it all the way back, our mass advertising, TV ads that have been reaching people now for years, just the idea of surround sound built into the couch underneath the foam, underneath the fabric that can provide strong audio. Of course, people are best to go experience it for themselves because it's so good. It's so much better than you think it could be.

That is where we really see a future for our brand and technology. Why? Because there is no one in the mall anymore doing it. Period. The only few places that you can go to experience anything anymore are having their own changes in that industry and in customer behavior and whatnot. Lovesac is going to be the place to experience technology firsthand, home audio firsthand, and of course, in ways that are completely unique to Lovesac. It is going to be a mainstay of our brand. We are very confident. We are really excited about it. You are going to see a lot of innovation in Stealth Tech over these next couple of years. Thank you, Shawn. Thank you. At this time, we have reached the end of our question-and-answer session. I will hand the floor back to management for closing remarks.

Thanks so much for joining our first quarter fiscal 2026 call. Thank you so much to all of our investors who support this company and, of course, to our #LovesacFamily, who are the reason we wake up every day and make it great. This concludes today's conference. We disconnect your lines at this time. Thank you for your participation. Have a wonderful day.