Greetings. And welcome to The Lovesac Fourth Quarter Fiscal 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Rachel Schacter of ICR..

Thank you. Good morning, everyone. With me on the call is Shawn Nelson, Chief Executive Officer; Jack Krause, President and Chief Operating Officer; and Donna Dellomo, 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 you and not as a substitute for or in isolation from our GAAP results. A reconciliation of the most directly comparable GAAP financial measures to such non-GAAP financial measures 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..

Thanks, Rachel. Good morning, everybody, and thanks for joining us today. I will begin today’s call by discussing the financial highlights of our fourth quarter and full year results. After which I will review the key operational highlights for the year and the long-term opportunity we see for our brand.

Then, Jack Krause, our President and COO, will elaborate on our operational accomplishments and outline our key growth initiatives for this year. And finally, Donna Dellomo, our CFO will review our financial results and a few other items related to our outlook in more detail.

We had a strong fourth quarter and are very pleased with our financial results. Net sales increased by 64.4% to $64.2 million. Total comparable sales which includes same showroom and Internet sales increased 52.2% driven by a strong showroom comp increase of 43.5% and significant growth in our Internet business of 76.9%.

Our fourth quarter fiscal 2019 comparable sales were again driven by both transaction and ticket growth, as we continue to attract both new and existing customers alike through our digital marketing strategies, growing e-commerce platform and expanding showroom and shop-in-shop presence.

Adjusted EBITDA was $10 million for the fourth quarter versus $6 million for the prior year period. We achieved this year-over-year improvement despite significant increase in marketing spend of $1.8 million and a decrease of approximately $1.2 million in other non-recurring financing expenses over the prior year quarter.

For the year, we delivered on the financial expectations we set for ourselves of achieving a high sales growth rate and improved EBITDA on an annual basis. Net sales increased by 62.9% to $165.9 million.

Total comparable sales including same showroom and Internet sales increased 43.8%, driven by a showroom comp of 35.2% and growth in our Internet business of 75.1%. Adjusted EBITDA was $3.4 million in fiscal 2019 versus $1.3 million in fiscal 2018.

We also made great operational progress this past year against every one of our key strategic initiatives, which I will now review. Number one, we continued to create authentic product that reflects our Designed for Life philosophy, product that is high quality, customizable, sustainable and innovative.

Our unique products are patent protected and we increased our number of patents to 37 U.S. and foreign issued patents in fiscal 2019, up from 32 at the end of fiscal 2018. Number two, we leaned into traditional and digital marketing, which increased 99.8% year-over-year to drive brand awareness.

We are very pleased with the results, including nearly 56% increase in our new Sactionals customer base and a dramatic increase in new Sactional customers, while maintaining our strong repeat rates.

Number three, we accelerated our investments in infrastructure and technology to elevate our customer experience and to support the substantial growth that lies ahead.

Key investments in fiscal 2019 were the addition of point of sale iPads and chip card payment in all showroom locations, as well as completion of the first phase of our data warehouse implementation and the deployment of a showroom communication portal to enable unified communication among showrooms, management and headquarters.

Number four, increasing our showroom presence remains an integral component of our disruptive omnichannel model. This past year, we opened 13 showrooms and updated 16 locations to our experiential showroom prototype and continue to see great returns on these investments. We operated 553 total shop-in-shops during the year with Costco.

The shop-in-shop format continues to prove very effective in building awareness of our brand and product offering and it is also driving customer acquisition, particularly in areas where we don’t have a showroom presence.

Number six, we drove higher levels of social media engagement with our very active social media followers across platforms including Facebook and Instagram. For the fourth quarter, our social awareness campaigns reached over 50 million plus followers on Instagram via seeding driving up to over 100% growth versus last year.

Facebook unpaid pages likes increased 50% in Q4, while improving on our engagement rate by 15%.

We believe it is important for our investors and supporters to fully understand our view of what Lovesac can become over time and how management thinks about the business and its long-term potential in order to understand our investments and near-term focus.

We continue to believe that our brand is in its infancy, which may sound surprising for a brand that has 20 years of history already, but even though Sactionals themselves were invented sometime ago, we have only recently perfected the product and unlocked the advertising model that is delivering appropriate consumer awareness for what is a category disruptive product.

Sactionals are proprietary to us alone and has become the primary driver of our continued robust financial growth.

Our total addressable market within the overall furniture category is the segment of couches, chairs and seating and is $31 billion in size, with our now proven direct to consumer business model, we are well-positioned to gain market share using our multi-pronged approach that includes showrooms, shop-in-shops and a vibrant e-commerce site.

Combined with our effective, proven and expanding marketing strategies, we are focused on driving brand awareness, customer acquisition and customer retention, as we capitalize on the substantial opportunities for market share gains.

Lovesac’s core point of differentiation is our ability to invent patent and bring to market new platform based life meaningful products that can have widespread appeal, as we have done with the sofa category through Sactionals.

We are actively designing and seeking patent protection on products in new categories, but it will likely be some time before we engage in bringing any of them to market.

We believe the Sactionals platform itself to still be very formative in its evolution and its acceptance broadly and our focus for the near-term will be on reaching more consumers faster and providing the experience needed for them to understand the many benefits of investing in this ever adaptable platform versus wasting their money on a throwaway couch.

And in adding to their collection over time as a repeat customers do with new accessories and upgrades to the Sactional suite of products.

We have numerous product additions to this platform yet to reveal that will further enhance the appeal of the Sactionals platform to new buyers and provide existing customers with the opportunity to expand and upgrade with us over time, not to mention the Sacs family of products continues to enjoy organic growth of greater than 20% annually with very little advertising support.

Our strategic approach to business and tactical design solutions stem from our commitment to our unique Designed for Life philosophy, which essentially calls for product platforms that are built to last a lifetime and designed to evolve with people’s real life changes.

We have observed since implementing this approach to design that the final products we bring to market are simply better, providing more utility and reliability to the consumer, while being more novel in their sphere and thus more meaningfully patent protected both for us on a utility patent basis.

Not to mention more sustainable, which is good for everyone and is a message that undeniably resonates with our core consumer.

I will also mention that as part of our commitment to the Designed for Life philosophy, we are simultaneously making efforts in sourcing and manufacturing to utilize even more sustainable inputs and to strengthen, make redundant and shorten the supply chain overall in an effort to ensure a more stable, risk mitigated business while reducing our impact on the environment.

Pursuant to this strategy, we are excited to announce our plans to invest roughly $2.8 million of CapEx in a vertically integrated light manufacturing operation in Utah to stuff foam-filled Sacs to service the Western United States, which will be operational by Q4 of this year.

We have previously been be holding to only one third-party manufacturer for this namesake product of ours and we view redundancy in manufacturing as a key business principle.

We expect this facility to deliver efficiencies in both the cost of delivery to end users, as well as in the cost of goods of our Sac business over the long-term, but we will not begin to experience these efficiencies until the following fiscal year.

We have made and are making significant changes to the way we do business to achieve real results as it pertains to sustainability, perhaps the best evidence of this is since revising our core Sactionals product last year to utilize only yarn spun from 100% recycled plastic water bottles on all of our core Sactionals upholstery.

We estimate to have diverted more than 17 million plastic water bottles from the waste stream last year alone, We believe that even in our formative scale, that already makes us the single largest converter of plastic waste to consumer home decor fabric in the United States and we are still scaling rapidly.

We continue to do even more of this as we plan to utilize Repreve recycled yarn in many of our decorative Sac and Sactionals covers going forward as well.

Given the nature of the commitment we make to the consumer by selling them a couch they could have the rest of their lives if they will only add to and upgrade it over time, we take a very long view of our prospects and make decisions to support that long view of growth and reliability as a brand over time.

We go out of our way to take care of our customers. We believe the continued and aggressive expansion of our patent portfolio affords us the time to do these things and do them right.

While we have committed to maintaining high growth rates at the top line, but not growing too fast and by investing in the business thoughtfully each year, we will produce the results we have committed to on an annual basis, including some expansion of our EBITDA level on a dollar basis in the near-term.

Coming off significant growth in fiscal 2019, we expect to yet drive 40% to 45% growth on top of that in this year, which we are already almost a quarter into.

Once we achieve some kind of meaningful market share over the long-term, our overhead begins to leverage significantly and because we intend to maintain what are already high gross margin ranges for our category, we expect to grow into what should be best-in-class EBITDA margins over the long-term.

In terms of this year fiscal 2020, we characterize it as a year of investment in the infrastructure necessary to support what will become a widely adopted consumer brand. We are doing many things as a team to shore up this business and prepare it for massive scale.

Our intention is to not only become one of the most well-known furniture brands, but the most beloved as well.

This requires us to unrelentingly improve the overall customer experience, from shopping to checkout to delivery to unpacking and set up and to what is intended to be a very long-term experience for the consumer with our product and their relationship with our company, every facet of our processes, people, logistics, supply chain and especially IT infrastructure must be invested in and upgraded in order to support the kind of growth we expect.

As I have said before, we are running this business for the long-term and the pace of our investments will often result in quarterly fluctuations due to timing and may affect near-term profitability, particularly on the EBITDA line, which is why we don’t believe prescriptive quarterly guidance is appropriate.

In terms of our thoughts around tariffs for fiscal 2020, we continue to assume that in our outlook for this year the enforced 10% tariffs on goods produced in China until there is further update.

We have taken steps to mitigate most of the effects of these potential tariffs from a gross profit dollar perspective, in part due to the fact that we began resourcing much of our overseas production to Vietnam over a year ago and third-party manufacturing operations for us in Vietnam are actively shipping goods.

From a gross margin rate standpoint, we expect 2 percentage points to 3 percentage points of downward pressure on gross margins due to tariffs this year. However, through various tactics to mitigate them that Jack and Donna will elaborate on, we still expect to achieve further EBITDA dollar expansion on an annual basis this year.

In summary, we are very pleased with our results for fiscal 2019 and we made good progress on our strategic initiatives. We will continue to lean into marketing and invest in our infrastructure in fiscal 2020 as we position the brand for enduring long-term success.

Before I turn the call over to Jack, I want to thank all of our team members at HQ and across all showrooms for their tireless contributions to our company and our customers. They have driven our success to-date and we look forward to building on this track record in fiscal 2020.

I will now turn the call over to Jack, our President and COO, to go over key priorities for this year..

Thank you, Shawn, and good morning, everyone. As Shawn said, our fourth quarter was a strong end to a robust year of sales growth with good operational progress made against our key priorities. Let me give you an update on our progress and plans for the year.

Our first priority is expanding digital TV, direct mail and social marketing to increase brand awareness and drive sales. Our marketing strategies continue to be very effective and are yielding great results as evidenced by our comparable sales growth of plus 76.9% for e-comm and 43.5% for showrooms in the fourth quarter.

Our first year customer value or CLV, which is a measure of the first year someone is The Lovesac customer, hit a record of 1,540 in fiscal 2019, up from 1,206 in fiscal 2018.

As expected, in fiscal 2019, our customer acquisition cost or CAC increased to approximately $309 from $283 in fiscal 2018, as we increased marketing to drive brand awareness including our first ever national TV campaign for Labor Day.

For the year, we increased our year-over-year marketing expenditures by nearly 100% to $18.4 million and our CLV to CAC ratio finished the year at 5x, which is indicative of our ability to efficiently scale.

We continue to be very pleased that our CLV far exceeds our CAC and we expect this trend to continue as we expect our increased marketing investments that will drive CAC higher will be accompanied by CLV increases.

Other key metrics that highlight the effectiveness of our marketing are the 56% increase in new Sactional customers and also the 38% of transactions that are driven by repeat customers for the fiscal 2019 year.

The ROI on our marketing efforts remains extremely attractive in markets with and without a showroom, which we saw again in the fourth quarter with our national advertising campaign supported by strong digital marketing.

Our national media flights ran from November 12th through December 2nd and were supported by digital and social media efforts for the balance of the year. National media performance improved significantly at slightly reduced rates netting efficiency gains.

E-com performance curves accelerated disproportionately with incremental sales volume being driven through the web channel. Digital DTC, paid search and affiliate marketing, volumes all accelerated demonstrating the synergy between national advertising and a more targeted digital programming.

The positive results we saw from these campaigns are a true testament to the effectiveness of our DTC model. In markets with a showroom, we continue to see marketing efficiency significantly above levels in markets without showroom presence, supporting our plans to continue to open showrooms in high-density areas.

The fact that campaign results are still strong in markets without a showroom is proof that we can build awareness and sales in new markets before we invest in CapEx for showrooms.

In addition, we remain very active on social media to stay connected with our passionate and loyal customers, which is reflected in the significant increase in social media engagement and followers across Facebook and Instagram.

We view social media advertising as a very effective way of increasing our brand awareness and also a way to grow our Lovesac family as fans constantly post pictures with our products and spread the word about Lovesac.

For the fourth quarter, our social awareness campaigns reached over 50 million followers on Instagram via seating, driving up to over 100% growth versus last year. Some of the seating highlights being make meals [ph] with 16.1 million followers, David Dobrik with 7.4 million followers and Jordyn Jones with 5.5 million followers.

Facebook unpaid page likes increased by 50% in Q4, improving our engagement rate by 15%. We believe these specifics demonstrate our authentic relevancy with our target audience and the cultural currency our brand has with our target customer.

For fiscal 2020, we will optimize and lean into marketing as we continue to extend our brand reach given our low levels of brand awareness. As a result of successful testing, we will be using 15 second spots as part of our overall TV mix resulting in an opportunity to increase our marketing efficiency.

We will also test the viability of always on TV during Memorial Day and the Fourth of July time periods. In addition, we will expand our paid social presence into Pinterest, a new channel for Lovesac where the target is highly engaged and seeking inspiration.

And lastly, we will test interest of niche target market audiences including the eco-friendlies, pet owners and parents with The Lovesac brand by targeting them in social with creative that resonates to them.

Next, investing in infrastructure capabilities, particularly technology is another key area of focus for us as we enhance the customer experience and scale the brand.

In the fourth quarter, the business benefited from the previously discussed infrastructure improvements in our showrooms including a technology refresh across the fleet with addition of point of sale iPads, Internet upgrades, Wi-Fi network chip and card payment devices in all locations.

We are pleased with the first phase of our data warehouse implementation, which allows near real-time online sales reporting for all channels among other features, the deployment of a showroom communication portal to enable unified communication among showrooms, management and headquarters.

In December, we launched our Lovesac app for iOS and Android that allows customers to design their own Sactional, while providing in-room sizing and 360 degree visualization, and the customer response has been very positive as evidenced by sales generated from the app in Q4 as well engagement stats from the app email, which were very high with an open rate of 71% and an AOV of $3,400.

In addition, we are continuing to integrate our web and showroom team goals in order to provide a better customer experience by creating a culture of omnichannel accountability. In fiscal 2020, we plan to invest in technology, supply chain and customer service.

In the first quarter, we have already implemented the podium SMS platform, which is a platform that enables our associates to request Google Reviews from new customers, improving our natural search ranking. This SMS vehicle is also being used to enhance communication experience between our showroom customers and sales teams.

With SMS open rates hovering around 98%, our teams can efficiently follow-up on quotes, as well as provide quick post-purchase support to a new customer in a moment with an associate in their home market.

Our investment in these areas will also include a re-concepting of the showroom with additional technologies designed to enhance the shopping experience. We are continuing our focus on supply chain optimization including network, systems and delivery option enhancements.

Included in our investment plans for the year is the opening of a small manufacturing facility for Sac that will allow us to achieve some much needed redundancy for this product line. While we do expect to reclaim a bit of margin in the long run, overall financial implications in fiscal 2020 will be immaterial.

We are also focused on making improvements to internal financial processes and our ERP in order to improve customer experience and the clarity of our information. The third key element of our growth strategy is increasing and improving our showroom presence.

Showrooms are a key component of our multi-pronged approach to continue to gain market share as our brick-and-mortar presence helps expand brand awareness. We did not open any new locations in Q4 and for the fiscal 2019 year, we had a total of 13 showroom openings. We ended the year with 75 showrooms in 30 states in the U.S.

with locations in top tier malls, lifestyle centers and high visibility street locations. We also updated four showrooms in the fourth quarter from the legacy store model to our tech enabled experiential showroom format. We ended the year with 77% of our fleet in the updated format.

As mentioned earlier, our investment in this area includes consumer research on the customer journey and a re-concepting of showrooms with additional technologies designed to enhance the omnichannel shopping experience.

We see significant growth runway ahead of us for our showrooms and in fiscal 2020 we are planning to open between 15 and 20 new locations.

Turning to our shop-in-shops, which allows to capitalized on customer acquisition opportunities in high traffic locations by showcasing a limited offering of our products in areas where we don’t necessarily have showroom presence.

In the fourth quarter of fiscal 2019, we operated 141 shop-in-shops with Costco, up from 75 in the fourth quarter of the previous year. The increase is reflected in the 191% increase to 5.5 million in our other channel sales, which includes our pop-up shops in Costco locations.

Shop-in-shop productivity continues to increase and was up 14.7% for the quarter. Given the strong results we are seeing from our showrooms, we will continue to expand our showroom presence in fiscal 2020, while also exploring similar opportunities to deploy this concept with other retailers that we will keep you updated on.

So, in summary, we are very pleased with our fourth quarter results that capped a strong year for The Lovesac brand. We made good progress on our strategic priorities as we continue to successfully expand the business and make important foundational investments to drive as well as support the substantial growth that lies ahead.

And with that, for a more detailed review of our fourth quarter results as well as a few items related to our outlook. I will now turn the call over to Donna Dellomo, our Chief Financial Officer..

Thank you, Jack. Good morning, everyone. I will begin my remarks with a review of our fourth quarter and fiscal 2019 results and then provide some commentary around our thoughts for fiscal 2020. We are very pleased with our Q4 results, which marks a strong end to fiscal 2019.

As a reminder, the fourth quarter of fiscal 2019 was a 13-week period, compared to a 14-week period in the fourth quarter of fiscal 2018. Net sales increased 64.4% to $64.2 million from $39 million in the prior year quarter.

This sales growth was driven by strong showroom, Internet and shop-in-shop performance with an increase in new customers, as well as an increase in the total number of units being sold, reflecting a higher average order volume per customer.

Also, our advertising and marketing investments, which drive brand awareness and an increase in the number of showrooms helped fuel our Q4 sales performance.

Comparable sales, which include showroom and Internet sales, increased 52.2%, comparable showroom sales increased 43.5% and represents our ninth consecutive quarter of positive comp showroom sales increases. Internet sales increased 76.9% versus an increase of 55% in the prior year period.

We opened no new showrooms, remodeled four legacy stores into our new showroom format and had two showroom closures during the fourth quarter. We ended the year with 75 showrooms. Looking at our results by channel, showroom sales increased 52.3% to $43.5 million.

Internet sales increased 76.9% to $15.2 million and our other channel, which includes our shop-in-shops in Costco locations increased 191.1% to $5.4 million.

By product category, our Sactional sales increased 66.5%, our Sac sales increased 61.7% and our other category sales, which include decorative pillows, blankets and other accessories, increased 47.2% in the fourth quarter as compared to the prior year quarter. Gross profit dollars increased 54.9% to $35.5 million in the fourth quarter.

Gross margin percentage decreased by 340 basis points to 55.3% from 58.7% reported in the same period last year. A decline in gross margin percentage year-over-year was expected.

However, stronger than predicted Sactional product sales in the fourth quarter and a $250,000 impact related to tariffs led to a lower gross margin than originally predicted by 140 basis points.

The full 340 basis point decrease in gross margin percentage for the fourth quarter this fiscal as compared to prior year’s quarter was primarily due to growth in Sactional products, which carry lower margins than Sacs and higher freight costs as a percentage of net sales, an increase in sales for our shop-in-shop channel, which also carries a lower gross margin than our other channels, acts as a media amplifier and delivers positive operating margin to the company and the marginal impact of tariff related costs that were mitigated through SG&A initiatives.

The decrease in gross margin percentage was partially offset by reduced cost of our Sactionals and Sac products, primarily related to the cost savings from a change in the sourcing of our Lovesoft and down blend fills and lower costs negotiated with our vendors through cost reductions and volume rebates.

With the stronger than expected overall sales, particularly Sactional and shop-in-shop revenues, we drove stronger than planned gross profit dollar growth. For the fourth quarter, total SG&A excluding advertising and marketing expense increased 33% to $21.4 million from $16.1 million in the fourth quarter of last year.

Excluding an increase of $100,000 of other non-recurring IPO and financing initiative related expense, total SG&A increased to $21.3 million.

The increase in SG&A was driven largely by an increase in employment costs of $1 million, $1.5 million of increased rent associated with our net addition of nine showrooms, $2.8 million of expenses related to the increase in sales such as $400,000 of credit card fees, $500,000 of web affiliate program and web platform hosting commissions, and $1.9 million of shop-in-shop sales agent fees.

Overhead expenses increased $400,000 to support the company initiatives and public company expenses and stock-based compensation decreased $500,000. As a percent to sales, total SG&A expense leveraged by 789 basis points, demonstrating that both our variable and non-variable costs scale favorably as we continue to increase revenues.

Our investments in advertising and marketing, which benefit extended periods increased $1.8 million or 52.1% over Q4 prior year. Given our strong Q4 volumes, we leveraged advertising and marketing expenses by 66 basis points this quarter.

As we have discussed before, advertising and marketing investments are a key priority for us given our low brand awareness and very attractive financial returns on this spend. As evidenced in the CLV, the CAC cost economics that Shawn and Jack both went over.

We will continue to lean into advertising and marketing with a projected annual spend of 10% to 12% of net sales.

The year-over-year increases in our advertising and marketing investments that you will see in any given quarter can and will vary often substantially as we maintain flexibility when investing against this very compelling customer acquisition opportunity.

Depreciation and amortization decreased $217,000 in the prior year period to $621,000 due to the timing of asset disposals. As a result of these factors, operating income was $8.2 million compared to operating income of $2.5 million in the fourth quarter of last year.

Excluding $100,000 of non-recurring items related to the IPO and other financing initiatives in the fourth quarter of fiscal 2019 and $1.3 million of non-recurring items related to financing initiatives in the fourth quarter fiscal 2018, operating income was $8.3 million for the fourth quarter of fiscal 2019 and $3.8 million for the fourth quarter of fiscal 2018.

Net interest income was $213,000. This reflects $286,000 of earnings related to the net proceeds from the initial public offering and interest expense of $73,000 related to unused line fees and amortization of deferred financing fees on the asset based loan in the 13 weeks ended February 3, 2019.

Tax expense in the fourth quarters of fiscal 2019 and fiscal 2018 was less than $30,000 relating to minimum state income tax liabilities.

Before we turn our attention to net income, net income per share and EBITDA, I would like to point out that my discussion of these metrics will focus on net income and net income per share adjusted for the IPO and other financing costs, as well as adjusted EBITDA.

Please refer to the terminology and reconciliations between each of our adjusted metrics and their most directly comparable GAAP measurements in our earnings release issued earlier today.

Net income adjusted for IPO and financing costs was $8.5 million in the fourth quarter of fiscal 2019, compared to $3.8 million in the fourth quarter of fiscal 2018. Net income per share adjusted for the IPO and financing costs was $0.63 in the fourth quarter of fiscal 2019 and $0.28 in the fourth quarter of fiscal 2018.

Adjusted EBITDA increased to $10 million from $6 million in the fourth quarter of last year, with the year-over-year change more than highly driven by increase in revenues and the resulting SG&A leverage. Turning to our full year results, net sales increased 62.9% to $165.9 million from $101.8 million in the prior year.

Comparable sales, which includes showroom and Internet sales increased 43.8%. Comparable showroom sales increased 35.2%. Internet sales increased 75.2% on top of an increase of 52.9% in the prior year.

We opened 13 new showrooms, closed four and remodeled 16 legacy stores into our new showroom format during the year and ended the year with 75 showrooms.

Looking at results by channel for the year, showroom sales increased 45.3% to $113.1 million, Internet sales increased 75.1% to $33 million and our other channel, which includes our shop-in-shops in Costco locations, increased 286% to $19.8 million.

By product category, our Sactional sales increased 65.7%, our Sac sales increased 53.3% and our other category sales, which includes decorative pillows, blankets and other accessories increased 88.1% as compared to the prior year. Gross profit dollars increased 58.8% to $90.9 million in fiscal 2019.

Gross margin percentage decreased by 140 basis points to 54.8% from 56.2% in fiscal 2018.

The decrease in gross margin was primarily due to the increase in Sactional products, which carry lower margins than Sacs and higher freight costs as a percentage of net sales, an increase in our shop-in-shop channel sales, which also carries a lower gross margin than our other channels, acts a media amplifier and delivers positive operating margins for the company and a marginal impact of tariff related costs that were mitigated through SG&A initiatives.

The decrease in gross margin percentage was partially offset by reduced costs of our Sactionals and Sac products primarily related to cost savings from a change in the sourcing of our Lovesoft and down blend fills, and lower costs negotiated with our vendors through cost reductions and volume rebates.

With the stronger than expected overall sales, particularly Sactional and shop-in-shop revenues, we drove stronger than planned gross profit dollar growth. For the full year, total SG&A, excluding advertising and marketing increased $25.6 million to $76.4 million from $50.8 million last year.

Excluding an increase of $2 million of non-recurring IPO and financing initiative related expenses, total SG&A increased to $48.8 million.

The increase in SG&A was driven largely by a $10.6 million increase in sales related expenses to support sales growth such as credit card fees and commissions, in addition to a $4.5 million increase in rent expense related to the increase in the number of showrooms, $3.9 million increase in employment costs, a $2.4 million increase in stock compensation related to restricted stock awards and an increase of $1.9 million in expenses for our IPO and other financing related costs.

As a percentage of sales, total SG&A leveraged by 387 basis points due to leverage in employment costs and rent expense. Our investments in advertising and marketing increased $9.2 million or 99.8% to $18.4 million or 11.1% of sales from prior fiscal.

Depreciation and amortization increased $900,000 from the prior year period to $3.1 million due to capital investments for our new and remodeled showrooms. Operating loss for fiscal 2019 was $7 million, compared to an operating loss of $5 million in fiscal 2018.

Excluding $2 million in non-recurring items related to the IPO and other financing initiatives in both fiscal 2018 and fiscal 2019, operating loss was $5 million in fiscal ‘19, compared to $3 million in fiscal 2018. Net interest income was $355,000.

This reflects $571,000 of earnings related to the net proceeds from the initial public offering and interest expense of $216,000 related to unused line fees, interest expense on borrowings and the amortization of deferred financing fees on the asset based loan for fiscal 2019.

Tax expense in fiscal 2019 and 2018 was less than $30,000 relating to minimum state income tax liabilities. Net loss adjusted for IPO and financing costs was $2.6 million in fiscal 2019, compared to a net loss of $3.5 million in fiscal 2018. Net loss per share adjusted for the IPO and financing costs was $0.19 in fiscal 2019 and $0.27 in fiscal 2018.

Fiscal 2019 adjusted EBITDA increased $2.1 million to $3.4 million versus $1.3 million last year. Turning to our balance sheet, we ended the year with $49.1 million in cash and cash equivalents and $31,000 in debt related to unused line fees on our ABL.

Ending inventory increased 125% year-over-year driven by an increased investment in the weeks of supply of inventory on hand to support sales growth across all channels to be agile enough to support the success of our advertising and marketing investments and an increase in capitalized freight and warehousing costs relative to the build in inventory and tariff charges.

Now, while we are not providing formal guidance, I would like to discuss a few items as it relates to fiscal 2020. From a showroom perspective, for the full fiscal year 2020, we plan to open 15 to 20 new showrooms this year and remodel eight.

We intend to operate approximately 690 pop-up shop-in-shops this year versus 553 pop up shop-in-shops last year, with more than 75% of the shop-in-shops occurring in the first three quarters of fiscal 2020.

We expect to deliver strong levels of sales growth although a moderation from 2019 levels and we intend to drive sales growth for the full year between 40% and 45%.

While we expect improvement in adjusted EBITDA dollars for the year due to the timing of our tariff mitigation efforts and investments into advertising, marketing and infrastructure, we expect year-over-year adjusted EBITDA declines of $2 million to $3 million in Q1 and again in Q2, to remain relatively flat in Q3 and a significant improvement in Q4.

Net result is an increase in adjusted EBITDA dollars for fiscal 2020. We expect gross margins for fiscal 2020 to be lower than fiscal ‘19, principally related to the following. The first, expected tariff pressure, which is being mitigated by margin and SG&A initiatives.

The second is investments in our distribution infrastructure to support future growth. The third is continued shift in product mix toward Sactionals. And the fourth, as well is a slight impact from higher shop-in-shop channel mix.

These decreases are partially offset by gains in product discounting strategy and reduced costs relative to vendor sourcing strategy. As a result, embedded in our full year outlook is approximately 300 basis points of gross margin pressure due to the combination of the just mentioned factors.

Given the ramp of our tariff mitigation strategy, we expect Q1 to face the most pressure with a gross margin decline of over 350 basis points. In terms of SG&A, excluding marketing expense, as previously mentioned, we expect the most significant SG&A leverage to be generated in Q4 given the seasonality of our business.

As a reminder, embedded in our SG&A outlook is all of the investments we are making into the business across people, process and infrastructure, and our Q4 volumes enables -- enable us to leverage this investment over prior year.

Regarding advertising and marketing investments, we will continue to ramp up in fiscal 2020, given the attractive returns on this investment with the most deleverage in Q1 and an annual investment of 10% to 12% of net sales.

So, in summary, while we continue to expect quarterly fluctuations due to the timing of our tariff mitigation efforts, our advertising and marketing investments and investments across all areas of the business to support the significant growth opportunity we have, we anticipate that we will again deliver a high sales growth rate and an improvement in absolute level of adjusted EBITDA for the full fiscal year 2020.

Finally, as it relates to capital expenditures, we expect to incur approximately $13 million of CapEx in fiscal 2020, with the vast majority of this spent on the opening of 15 to 20 showrooms, the remodel of approximately eight legacy stores, and approximately $2.8 million being invested into a company-operated Sac manufacturing factory.

The remaining spend is being allocated to technology in our showrooms, inventory management and logistics systems, e-commerce platform enhancements and for headquarters data and support systems. For all other details related to our results, please refer to our earnings press release.

With that, we would like now to turn the call back to the operator who can open it up for questions.

Operator?.

[Operator Instructions] Our first question comes from the line of Dave King with ROTH Capital Partners. Please proceed with your question..

Thanks. Good morning, everyone..

Good morning..

Good morning, Dave..

First -- hey. So maybe first, sticking with the guidance commentary a bit, Donna, you talked about the margin pressures and marketing deleverage in Q1.

I guess, how should we be thinking about the revenue growth in the first quarter versus the 40% to 45% annual pace, I think, you laid out, you are going to have National TV this year, I think, versus not having it in the first quarter last year.

Just how should we be thinking about that?.

Hey, Dave. This is Jack. I will take a little -- I will take the answer first, just because it’s more of a revenue topline.

I think we are going to see pretty constant growth throughout the year, perhaps on an annual -- on a first half versus second half a little bit lower in comp performance, but two-year comps are going to be significantly stronger in the second half.

Because the combination of obviously we are lapping over regional advertising in the first half with national in the second half -- with national in the first half and as we get into the second half, we see a lot of opportunities in terms of netting efficiency gains with some of the testing we are doing and we are just getting a lot smarter about marketing into the holiday period..

Okay. That helps.

And then maybe on that marketing spend Jack, are you still getting the same level of ROIs, on TV, for example, I think, you -- previously you talked about 75%, is that still the right way to be thinking about that, has that improved over time?.

Well, I -- what I would tell you that right, the fourth quarter ROIs were the strongest we have had.

I don’t want to get into too many details on numbers, because of attribution makes it hard to give you an overall program ROI that’s apples-to-apples, but we are very, very pleased and overall as the company, the ROIs are the strongest we have ever had..

Okay. It is great to hear. And I guess just one more from me.

On the Costco business, can you talk about how that’s performing, is the revenue per day there still increasing and then what sort of visibility do you have in the future gains there, it sounds like you already sort of have the road show number kind of in plan, is that something Costco has shared with you? And then a follow-up to that is, how should we think about the potential for future shop-in-shop relationships beyond Costco? Thanks..

Okay. Great question. So, obviously, with Costco, we mentioned the growth from last year and I think Donna did outline the number of shops -- shop-in-shops we will do this year. We did see in the fourth quarter increased productivity.

So it’s sort of like a comp shop-in-shop number of about 30% increases and we think that was obviously driven by our increased awareness in advertising that we implemented in the fourth quarter. In terms of thinking about the future of the business of shop-in-shops.

Clearly, we do have some growth opportunities with Costco, with really the frequency of shops, and perhaps, some expansion into other areas in the mid-term.

And in the near-term also, we are investigating opportunities for other partnerships because we believe this is a really effective way of creating awareness with low CapEx spend if we find the right partners..

Great. Great to hear. Thanks for taking my questions and nice quarter..

Thanks..

Our next question comes from the line of Camilo Lyon with Canaccord Genuity. Please proceed with your question..

Thank you. Good morning, everyone. Great job. Nice quarter..

Good morning, Camilo..

Donna, I was hoping that maybe you could provide a little bit of color on the components of your 40% to 45% sales growth this year, as we should think about the difference between your Internet growth expectations versus your store comps. If you can provide any sort of shape to that, that would be great..

I will start this out and then I will let Jack finish the sentence. But essentially it’s the 15 to 20 showrooms. It’s the continued investment in marketing. It is the increase in our shop-in-shops that we are doing with Costco. It’s the increase in our Sactional business what drives greater AOV.

So it’s really the combination of those four things that are driving. And to Jack’s point, it’s the two-year comp which is very -- we will say we are very happy about what the two-year comp is showing us. So all those factors together is what essentially is driving that 40% to 45% increase in revenue year-over-year. Jack said that’s good..

Okay. I guess just moving to the inventory piece. Just a little bit, if you could just give a little bit more color on the composition of that inventory and as how you -- because I think you could carry a decent amount of on hand inventory to have that quick delivery time.

So if we are seeing inventory up over 120%, how should we think about that enabling you to either achieve or surpass your sales growth objectives?.

Yes. So we did make a conscious effort in fiscal 2019 to build those inventory levels to make sure that we can ship as quickly as possible and remain in stock on all SKUs. So last year, you saw that big build of the 125%.

We do not expect to see that significant increase this year, although, we will see an increase to support our multiple distribution facilities strategy, but it will not be to the extent that you saw in fiscal 2019.

But it did allow us to especially make sure that we can ship as quickly as possible to our customers in addition to handle inventory on hand for the marketing to pull the levers on some testing -- test marketing. And as Jack mentioned earlier we are seeing the ROI on those marketing investments to really be very positive for us.

So, all combined, we just want to make sure that inventory doesn’t become an issue at all for us to be able to support the company’s growth and our marketing initiatives. So I think we did a tremendous job in fiscal 2019 to make sure that we supported all of those initiatives. So we won’t see that growth in fiscal 2020 year-over-year..

Yeah. And just to add some flavor to the inventory growth, we have, obviously, we have a really fantastic model in terms of the way our SKUs are managed and we have really no seasonal products in all core SKUs.

So relative to a lot of other companies and merchandising strategies, this growth in inventory is at very low risk of becoming outdated and unusable. So it’s really key that we especially as a high growth company bet into our core product inventory at this point..

Yeah.

We have or we maintain inventories on our flagship covers, which are strategic into our best selling covers and then pretty much be concede, right?. So, to Jack’s point, we are not a merchandiser of inventory or inventory is active in our inventory grows..

Yeah..

Got it. That’s great color. And Jack, my last question is on just general shop-in-shops, we used as a example. As you think about increasing your footprint with them this year versus last and how that marries with your brand awareness rising.

How do you -- at what point do you start to -- at what point does the math start to become more favorable to open up your own stores as opposed to having a third-party partnership with someone like Costco so that you can really fully capture that entire margin.

How do you think about the balance of those two components as you think about wholesale partnerships versus your own distribution?.

I think that’s a great question and it really speaks to an ability to reach a target customer or a desired customer group that we are not as effectively getting at this point in the short run.

I would absolutely say in the long run, when we see opportunities in high density areas, we will continue to use our learnings from areas that aren’t supported by showrooms, so for example, e-comm penetration, as well the shop-in-shop performance as indicators in our long-term plans in terms of the potential geographic areas.

So we will certainly and are certainly looking at those as indicators of future opportunities in terms of investment in those areas..

Got it. Thanks very much and good luck guys..

Thank you..

Thank you..

Thank you..

Our next question comes from the line of Alex Fuhrman with Craig-Hallum. Please proceed with your question..

Great. Thank you very much for taking my question and congratulations on a really great year. I wanted to ask about the trade-off as you think about investing in new showrooms versus ramping up your national advertising program, which seems like it’s certainly been tremendously successful this year.

Is one of those things kind of helping more than the other to bring in new customers or increase purchase frequency. I am just trying to understand, I mean, you are obviously opening a good clip of stores this year, it sounds like 15 to 20, which would be more than we have seen in quite some time for you.

But I guess I am just trying to understand the puts and takes as you try to figure out how many showrooms are going to open and wonder why not maybe even more just given that you now have this national advertising scale and you have a great balance sheet, seems like you are able to do all of these things at the same time.

I am just trying to understand kind of the puts and takes as you think about, which you want to be really leaning into whether it’s more showrooms or more advertising or both?.

Yes. It’s a great question and I think given our growth and our lack of awareness and our lack of penetration in the country these are some pretty big variables that can change over the next couple of years.

So we are certainly looking in terms of when we are looking at showroom potential growth, you know, what’s the long-term opportunity in that area and how do we look at some of these shop-in-shops and e-comm penetration as indicators of where we can go.

I think that one of the things we look at with showrooms is right now, we are opening showrooms at about the highest run rate we have ever seen where our first year showrooms are running at almost $1.7 million versus two years ago $1.1 million, so they are incredibly productive.

And when you are starting to see payback of less than two years, what you are really doing is investing really smartly and this -- what we call as the media amplifier.

So we really think of showrooms as media amplifiers and so how we look at it is what that’s payback period and then what’s the potential obviously long-term response of having that showroom amplifying the effect of media, because we are seeing in areas where we have showrooms versus not, 6x return on the marketing investment.

So we have to look at them as what’s really the synergy between the two and the cost of CapEx versus one versus the other. There’s really a synergy that we need to think through and look through a longer lens of five years to six years.

If it’s an area that has high population density and it’s a great location, clearly we know the long-term is to have a showroom there..

Great. That’s really helpful.

And then if I could just ask quickly, I think, it was mentioned on the call that you are looking at potentially partnering with some other retailers in addition to what you do with Costco, would that be a similar pop-up kind of format or are you potentially looking at having permanent year round stores within another retailer?.

At this point, there are several options on the table and as soon as we have material information to share we will get back to you..

Okay. That’s great. Thanks very much..

Thank you..

Our next question comes from the line of Sean Henderson with D.A. Davidson. Please proceed with your question..

Good morning, guys. Thank you for taking my question today. Just really quickly I know everyone’s kind of touched upon your efforts with Costco and it’s been very successful so far.

But just in terms of leveraging your relationship to potentially expand to some of its international warehouse locations, if you could provide some color on maybe what that would look like? That would be appreciated..

I would say Costco is certainly number one from their perspective. I am sure they would agree that they are very pleased with our performance and are very interested in pursuing some expansion. What we have to do is make sure that we have the right infrastructure and are adhering to the right regulations in order to expand to other countries.

We will be able to give you updates on that area in the next several quarters. I think we will have a better opportunity to fill you there..

Yeah. Great. Thank you..

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Shawn Nelson for closing remarks..

Thank you so much for joining us. We appreciate all of the support from all our investors and we intend to just keep going..

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