Greetings. Welcome to the Lovesac third quarter fiscal 2020 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, 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 Rachel Schacter. Rachel, you may now begin..

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 and not as a substitute for or in isolation from our GAAP measures. 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..

number one, we continue to test and learn on the marketing front; number two, we made strategic investments in our infrastructure to improve the overall customer shopping and delivery experience just in time for holiday sales, which position us for continued success as we scale; number three, we negotiated significant discounts with our remaining few vendors still producing in China and are already manufacturing the vast majority of Sactionals pieces, which by the way represent 57% of our overall sales in Vietnam and Malaysia; number four, we opened four new showrooms and completed no new remodels during the quarter as we continue to increase our physical presence; and number five, we enjoyed strong results from our pop-up shop business with Costco and successfully opened four permanent shop-in-shop locations inside of Macy’s stores in L.A., Atlanta, New York City, and Long Island.

These locations are operating now as a test that could lead to future expansion. We are pleased with the results even as we make adjustments to hone the operations of this new sales channel in real time. Jack will discuss our third quarter operational progress and expand on the details of these alternative sales channels in just a moment.

We are currently holding significant inventory levels of goods that were purchased earlier in our build-up for this holiday season before the recently established vendor discounts have been negotiated.

Because of this, the full effects of our sourcing work and strong discounts on China-made goods that are meant to offset tariff headwinds will not begin to positively impact our P&L until the end of Q1 next year.

We plan to have relocated all of our Sactional production out of China before the end of next year and manufacture the majority of all other goods, including covers outside of China by the end of Q4 next year as well. If special tariffs do not abate, we have a path to remove it all.

These moves will effectively eliminate our exposure to the special tariffs and also result in lower first cost for these goods even versus their original cost levels, which you will see start to flow through our P&L with the turnover of the associated inventory throughout next year.

As predicted, we have already seen our overall gross margins decline by approximately 370 basis points year to date. We believe that we are through the worst of our gross margin degradation and can expect a slow but steady recovery of the gross margin line beginning in Q1 of next year.

This expected recovery will be caused by previously purchased inventory cycling through the register, along with heavily discounted China-made inventory, along with goods manufactured in Vietnam and Malaysia actually being sold and flowing through our P&L as the majority of our cost of goods sold.

In terms of product innovation, we are excited by the launch of the new Sactionals Power Hub and Sactionals Storage Seat. Since the launch of both of these new products, just a few weeks ago, we have witnessed 45% of new Sactionals customers including a Power Hub, Storage Seat, or both in their transactions.

The new customers that are purchasing these products demonstrate an AOV - average order value that is $1,113 higher than those who do not. These two innovations so far are driving AOV higher by $150 across all Sactionals purchased, new and repeat. Sactionals are not just a one-and-done product.

Sactionals are a designed for life product platform that is meant to grow and evolve with your life, allowing consumers to add to it and upgrade it forever, even in ways they couldn’t have imagined when they originally bought the product.

Every Sactionals piece that we have ever sold over these many years already has the receiver hole for the Power Hub embedded in it, just waiting for its addition. Storage Sactional Seat can be integrated into existing Sactional setups purchased many years ago with no special considerations or alterations.

We believe that over the long term, this designed for life reverse-compatible way of doing business will result in customer satisfaction and brand loyalty levels that will be unprecedented in the competitive landscape, not to mention the platform’s unique implications in terms of real sustainability and reduced waste in landfills, which we are passionate about.

Numerous aspects surrounding each of these Lovesac inventions are of course patented or patent pending, and we continue to expand our vast intellectual property portfolio.

We continue to focus on our long term strategy and feel better than ever about our ability to aggressively gain market share in this giant and sleepy furniture category, even as we prepare to deliver step-wise innovation next year that will greatly expand our total available market opportunity and similarly disrupt yet another category.

In the current competitive landscape, it is important to understand how we are different from our industry, the competition, and any kind of comparable, none of which are a very good proxy for what we’re doing here.

We are a true direct-to-consumer omnichannel product company that invents things and demonstrates them to our customers in a very personal way. We do not follow a merchandising model.

Lovesac has zero low margin wholesale business, we are not an ecommerce company, a marketplace, or a DTC pure play chasing down rapid growth without regard to cash burn or profitability.

In fact, as we enter the fourth quarter and look forward to delivering another strong year of growth with positive adjusted EBITDA, if you were to add back the regrettably large figure that we have paid in tariffs by this year’s end, we would have made significant progress on our original intention to grow adjusted EBITDA meaningfully this year.

We view our rapidly expanding retail footprint as a key advantage over the various disruptive, high growth companies that one might compare us to. We are in 90 physical locations ahead of most of them and about to go even faster on that front.

Our tiny showrooms demonstrate some of the very highest productivity on a four-wall contribution basis of any retailer in any category that we’re aware of, and it continues to improve in real time.

While right now we are admittedly reinvesting much of our profits back into infrastructure to prepare for great scale, we are building toward an inflection point where, with sufficient systems, staffing and supply chain efficiency in place, our industry-leading gross margins can produce similarly attractive net margins some day.

This is a plan that will require many quarters to unfold, but even as it does, we believe that we can continue to achieve this rapid growth even while making marked improvements at the adjusted EBITDA line beginning next year, regardless of external conditions. In summary, I am very pleased with our progress throughout this quarter.

As we look to the pivotal fourth quarter of this year, we will continue to focus on executing against our strategic initiatives and leveraging our distinct competitive advantages to realize the significant growth potential that exists for this company.

Before I turn the call over to Jack, I want to again thank all of our team members for the great job they do day in and day out. Happy holidays to all of the hashtag-Lovesac family. Their hard work is driving our rapid growth and we look forward to building on this performance as we move into the final quarter of this year.

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

one, building scalable processes to replace the manual processes with automated applications such as order management, planning and replenishment, distribution, and logistics management; two, improving system integration between supply chain and our carriers, our 3PL distribution centers; three, reducing the cost per mile with the planned addition of two more distribution centers in fiscal ’21, with one on the east coast and the other on the west coast; and four, continuing to transition China-sourced product to Vietnam and Malaysia for covers and liners, which Shawn discussed earlier.

We’ll continue to keep you updated on the progress of each of these four priorities. Next, expanding and improving our showroom presence. We opened four new showrooms in the quarter, ending the quarter with a total of 84 showrooms with 73 locations now in the current rebranded design.

We remain on track to open 17 new showrooms, netting 15 for the year in fiscal 2020 with seven of those openings being planned in Q4 alone.

As Shawn mentioned earlier, we did see some timing delays of showroom openings in Q3, but we look forward to completing our openings for the year in the coming weeks and benefiting from our expanded presence from both a sales and brand awareness perspective.

As a reminder, the economics of our new showrooms are very favorable with pre-opening investments of approximately $350,000 per location, which includes floor model inventory capex and all pre-opening expenses, and the average payback of our showroom investments being under two years.

As we look to next year, our showroom openings will continue to accelerate and our shop-in-shop partners will expand. To support this growth, we are excited to announce the appointment of Clary Groen as VP of Real Estate.

Clary will lead the real estate strategy evolution and the selection process as we continue to grow our showroom, pop-up, shop-in-shop footprint and expand the Lovesac brand.

Clary’s previous experience in various retail real estate roles, such as Foresite Retail Advisors, Bluemercury, and Francesca’s, just to name a few, makes him a great addition to our team, and we’re looking forward to seeing the benefits from his expertise.

The creation of this new position demonstrates our focus and commitment to making the necessary infrastructure and talent investments to support the significant growth that lies ahead for Lovesac.

Turning to our pop-up shops, in the third quarter of fiscal 2020 we operated 192 pop-up shops with Costco, up from 155 in the third quarter of last year, which drove a significant increase in our other channel sales to $8.2 million from $5.9 million.

Pop-up shop productivity increased 7.5% in the quarter and has been a contributor to our growth in the past 24 months. In October, we also ran an 18-day event on Costco.com providing Lovesac with nationwide coverage that was very successful. We have scheduled an additional online event that will take place before year end.

We continue to value our strong and progressing relationship with Costco as our pop-up shops and online road show events allow us to capitalize on the customer acquisition opportunities in high traffic locations, including both their brick and mortar locations and their website, which provide us the opportunity to showcase the unlimited offering of our products to customers who may not know our brand and our unique product attributes.

As we continue to leverage this model and establish additional reach for the Lovesac brand, we launched our Macys shop-in-shop pilot in four locations during the quarter.

These four shop-in-shops are permanent asset-lite locations in key Macy’s stores, carrying the same digital technology of our showrooms and are staffed by Lovesac employees under the direct supervision of our sales operations team.

While still early, we’re very pleased with the initial results and positive customer response as new customers enjoy the live Sactional demo that, as experience has taught us, leads to increased adoption of the Sactional platform. Preliminary data shows that at the Macys locations, we are acquiring a significant number of new customers.

The plan remains to test these four initial locations for at least a full year prior to expansion, and we will continue to update you on the test details, performance, and potential expansion plans as that information becomes available.

In addition, we are continuing to explore shop-in-shop formats with other retailers, given the positive results we have seen thus far, and our expectation is for margin rate and contribution to be similar to our freestanding showrooms as we go forward but with less than a third of our capex investment.

In summary, we’re very pleased with all the operational progress we’ve made in Q3. As we look to the final quarter of the year, by far our most important from a sales volume and profit generation perspective, we have a strong start and we feel great about our positioning and marketing plans heading into the peak volume weeks.

We will remain focused on disciplined execution of our growth strategies to help drive market share gains and realize the significant opportunity we see in our brand.

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

the first being expected tariff pressure which is being partially offset this year by mitigation actions and SG&A initiatives; investments into our distribution infrastructure to support future growth; a slight headwind due to the continued shift in product mix towards Sactionals as well as a slight impact from higher pop-up shop channel net sales.

These decreases are partially offset by product margin gains relating to changes in discounting of promotional strategies, reduced product costs related to vendor sourcing strategy and negotiated discounts with vendors in China to mitigate tariff pressures, as well as an accelerated shift of sourcing outside of China.

In terms of SG&A, excluding advertising and marketing expense as previously mentioned, we continue to expect the most significant SG&A leverage to be generated in the fourth quarter given the seasonality of our business.

As a reminder, embedded in our SG&A outlook is all of the investments we are making in the business across people, process and infrastructure, and our Q4 net sales volumes enable us to produce the greatest amount of leverage on these investments over the prior year.

Finally as it relates to capital expenditures, we now expect to incur approximately $10.5 million of capex in fiscal 2020 versus our prior guidance of approximately $11.5 million due to a timing shift of investments of Sac manufacturing capex to fiscal 2021.

The vast majority of our capex this year is being spent on the opening of 17 showrooms, the remodel of approximately eight legacy stores, the opening of four Macy’s shop-in-shop pilot locations, and approximately $300,000 being invested into the Sac manufacturing facility this year.

The remaining spend is being allocated to technology in our showrooms, inventory management and logistics systems, ecommerce 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 now like to turn the call back to the Operator, who can open it up for questions.

Operator?.

[Operator instructions] Our first question is from the line of Brian Nagel with Oppenheimer. Please proceed with your question..

Hi, good morning. Thank you for taking my questions.

The first question I want to ask, just with regard to sales growth, and I know there’s a lot of moving pieces here, but in the fiscal third quarter as you discussed, the 25% sales growth, so that was down from something in the mid-40s in the second quarter, and then so far in the fourth quarter it’s popped -- sales growth has improved back to 40%.

So could you help me understand better just the rank order of factors that sort of say created that divot, if you will, in sales growth in the third quarter? Are you recognizing that the comparison got more difficult?.

Yes, this is Jack. I’ll handle that.

I think one of the key insights to look at that is if you look at something we haven’t seen in a couple of quarters based on cadence, is the fact that our overall comps, for example in showrooms, were greater than our showroom growth, so basically we had a pull-back lever on non-comp perspective of the business versus a year ago, and that really is tied to those showrooms that shifted back – approximately, you know we had seven showrooms that shifted between the third and fourth quarter in one shape or another..

Okay, so is there a way, Jack--not to push too hard at this, but could you look at your math and say if you didn’t have that shift in openings from Q3 to Q4, what Q3 sales growth would have looked like?.

Donna, I don’t know if you want to take a stab at that, what we think the impact was, the one-time impact?.

I can, but let me also note that we were originally predicting to be--our growth in the third quarter to be a little less than it was in the second quarter due to the things that Jack mentioned and also the growth of the pop-up shop business year over year.

If you go back to what we had said in the second quarter call, on the second quarter call again we had predicted to take a dip in the third quarter relative to that as well.

We’re anniversarying the media, the growth in our shop-in-shops, our pop-up shops year over year because we had significant growth last fiscal for a little lower in the third quarter of this year.

The sales, we’re probably looking at that shift in sales for the new showrooms opening probably to be approximately $2 million, which -- because we weren’t able to open originally as planned in the third quarter, it’s probably about $2 million impact on the top line..

But it’s important, Brian, to say if you look at, again back to the two years, I’d like to look at two-year stacks, Q3 the two-year stack was the highest it’s been year to date at 83% and we expect Q4 to be the highest of the year, so we are going over tougher comparables, but two-year stacks are continuing to be very strong..

Got it, that’s helpful.

Then another question with regard to sales, so you talked about the nice performance so far here in fiscal Q4, so as the calendar goes, we’re I guess, about halfway through the quarter, but just can you remind us where, given the lumpiness of the holidays in the fourth quarter, how much of Q4 business has probably been transacted so far?.

Wow, on a week to week basis, that changes pretty quickly. Donna. I’m not sure if you have that? It’s probably--I’d say we still have a good at least 50% of the quarter to go.

Is that correct, Donna?.

Give me a second, I’m just going to check that. .

Yes, I mean, I think one thing just to build on that while she’s looking at the number, is coming out, I think it’s really important to note that while we intentionally pulled back on the Labor Day marketing or media, really, because we saw an opportunity to really be a little bit more distinct between our awareness media into our conversion media.

We think we’re in a really nice place, especially with the wackiness around the Q4 and the shifts, so just to be on media full time and then just aggressively go with conversion digital media at the classic furniture buying period, so it gives us a real opportunity to expand our awareness to basically an always-on basis..

Yes, and just to confirm, we are right at around 50% at this point of Q4, Q4’s volume..

Okay. I’ll ask one more and then I’ll leave it to someone else. Congratulations on you quickly shifting the supply chain. So, what I heard you say is that as far as the tariff impact, we probably just saw bottom. The impact, you said it better - the impact upon gross margin, we just saw it bottom.

Is it still the assumption that as the supply chain initiatives take hold that Lovesac will essentially get back everything it lost in gross margin as a result of tariffs over the next several quarters or so?.

I’ll cover that and then I’ll hand it to Donna and Shawn.

As a large basis, we certainly-- we are the lowest level, I’d say, of margin and we’ll continue to leverage in our margin, but it’s also important to note that everything we gain from margin improvements won’t go back to building pure profitability in the short run because we have about 18 months where we’ve laid out a lot of infrastructure commitments, building showrooms, building a better WMS, etc., so while we will gain significantly at the margin level, we’ll leverage significantly in the next 18 months, we’re not going to aim to push 100% of that into EBITDA because we’re really just trying to build the base to the company being a billion-dollar company in the next couple years.

.

Yes, and I can--oh, go ahead, Shawn?.

You go..

Okay. To Jack’s point, that’s definitely something to keep into consideration.

As far as tariffs, just as a reminder, we do maintain 12 to 14 weeks of supply of inventory, so as we’re shifting out of China into Vietnam, we still do have inventory that’s been impacted by the tariffs that we’ll be selling through, so we’ll continue to see some impact, lesser and lesser and lesser impact, as we sell through that inventory, and there still will be a part of our inventory specifically related to fabrics that we’re working to move out of China, but there is still a--although the smaller part of our inventory we will still have a piece throughout this year that has a tariff impact, so we will still see some tariff impact, although significantly less than last year, but there will be initiatives next year related to supply chain and distribution that will impact the gross margin line, so we’re not expected to recoup 100% of the tariff impact.

But we absolutely do expect to see our gross margin line start to accelerate next year and then the years going out..

Yes, just one last comment on that. I think the short answer to your question, Brian, is yes, we will see gross margins recover fully as we view it, but not overnight and not even in the next four quarters fully.

It’s not the tariff issue alone, it’s our investments into supply chain that are happening and need to happen to really get this business as scalable as we’d like it to be, because we foresee high growth for a very long time.

WE are investing heavily in that, it will just be a long protracted recovery over--I won’t give you a number of quarters, but more than four quarters. But we believe we have a direct path to absolutely get it back to where we’d like it to be on gross margin..

Appreciate all the color. Best of luck with the balance of the year. Thank you..

Our next question is from the line of Thomas Forte with DA Davidson. Please proceed with your question..

Great, thanks. I have two questions. First, I wanted to talk about your ability to opportunistically get higher quality real estate locations for your new showrooms in today’s retail environment. Anecdotally, in Fairfield County I’ve seen some new excellent locations in both Greenwich and Westport.

Second, I’d like to give you the opportunity, given that I get a lot of questions on this, to talk about Macys. Macys as a retailer seems to have a number of challenges, but can you remind us why you think Macys is a great partner for your shop-in-shop efforts? Thanks..

Okay, I’ll just answer that in order.

I think Tom, from the perspective of real estate, you’re absolutely right on, and I think one of the things that having a very balanced business approach in terms of being omnichannel, being digital, having showrooms allows us, and having a fair amount of marketing behind us, is giving us new choices, so you certainly have seen off-mall locations as well as lifestyle center locations pop up.

We’ll continue to be significantly more diverse in the future as we look at our opportunities and we look at the investment in media relative to the investment in various levels of real estate as really shifts between customer acquisition approaches.

Net-net, I think you’ll see us more in off-mall in the long run as we’ve seen the ability to open street locations very quickly based on our media, and that gives us a lot of power in terms of negotiation. I think we’ll see considerable diversity in the future as well as an ability to leverage our real estate costs.

The second question was about Macys. Yes, so I think the one thing to think about Macys, they certainly have a lot of problems. It’s sort of like the end of the retail world and the retail apocalypse.

Macys certainly has their own challenges, but they’re a pretty large company still and they have a very large percentage of the overall furniture market in the U.S.

In fact, they’re one of the largest furniture retailers and they have a significant shared customer base that shares some of the values of ours, especially in some of their more premium locations, so I think we have a huge opportunity to learn where the biggest opportunities are, how their real estate works with ours, and how to leverage each other in order to create low capex, win-win, high brand awareness model.

A lot of opportunities, it is a test, and as soon as we have more insights, we’ll keep you posted; but there’s a lot of people shopping at Macys and the company is going to be around for a while, and I think we’re going to try to see if we can leverage off of each other..

Thank you Jack..

Our next question is from the line of Maria Ripps with Canaccord Genuity. Please proceed with your question..

Good morning and thanks for taking my question. Could you share maybe any additional color around your commentary of greater than 42% revenue growth so far this quarter, given that your guidance implies 42% to 47% growth in Q4? Then I have a follow-up. .

Donna, you want to start that, or--?.

Yes, can you just repeat that one more time? I’m sorry..

Yes, I was just asking whether you could maybe share some additional color around your commentary of greater than 42% revenue growth so far in the quarter, because I think your guidance implies 42% to 47% growth range in Q4. .

Well, we didn’t give Q4 guidance. Our guidance is saying 40% to 42% for the year.

Does that make it clearer?.

And Shawn did mention 42% quarter to date, which--so I think what we were trying to say is we don’t want to give guidance for the rest of the year, which it’s getting pretty close to giving it as we speak, but the bottom line is I think the point is, coming out of the Labor Day period and looking at our new marketing strategies that are not as based or focused as much on these big furniture events or these big sale events, such as Labor Day or Black Friday, has really allowed us to create a new baseline outside of those periods, which is giving us a 42% growth quarter to date and makes us feel confident about the business strategy going forward..

Right, and the only other thing we did say as far as for the fourth quarter, that we did feel that the fourth quarter would come in at or above the high end of the range of the 42%..

Yes, and we have said too that the fourth quarter stack comps would be the highest of the year..

Got it.

Then maybe on your advertising efforts, as your brand awareness increases, are you seeing any changes in the type of buyers you’re attracting to the platform, either from a demographic standpoint or their stickiness with the platform? Also, how are you thinking about stronger brand awareness driving higher repeat rates over time?.

Good question.

What I’ll do is say we are seeing some things change, and I will probably defer most of that answer to our Q4 results as we talk about the overall view of the year for customer acquisition and look at the customer, but we’re certainly seeing a broadening of customer appeal across larger sets of age groups, so we do see--along with the young millennials, we’re seeing what we call the silver foxes coming in and buying at significantly higher levels as well, so we’re seeing really an expansion generationally in the interest, and I think that’s clearly directed based on the TV awareness campaigns that we’ve used in the last year or so.

Then to follow up, what was your next question?.

That was it, that was the follow-up question. .

Okay..

You answered it, thank you so much..

Oh, and the AOV, I think you--yes, so we’re continuing--that’s a good point, because I did want to--. We’re continuing to see increased AOV and we’re very--I think we’re very positive on that, and it’s not through promotion. I think it’s really critical to say we’re going to see growth through repeat purchases through our new products.

We’re already seeing a really nice attachment rate driven by both new customers and also our embedded customer group in terms of the storage seat and the Power Hub, and they will continue to grow in terms of impact on the business in the out years. We’re very excited about what we’re seeing in terms of the platform.

Shawn’s discussion of the platform historically, that it’s not a product, it’s a platform and the benefits of it, we are clearly seeing that in the third quarter and we expect to see it going forward in terms of very high attachment rates and seeing immediate impacts on AOV with those customers trading up..

Yes, and I’ll add, Maria, because you had mentioned the notion of future business being driven by word of mouth and by the--you know, the context that’s easy to forget is that Lovesac has less than 2% brand awareness. Sactionals are a very unique invention that masquerades as a couch, but it’s quite unique in the landscape. There’s nothing like it.

As Sactionals catch on someday beyond our forcing it through the funnel with advertising, as they become popular, the business has a tremendous opportunity to enjoy a tailwind that just comes from brand awareness that we don’t have yet, and we often overlook mentioning that because it’s impossible to plan, but it’s undeniable that the competitors who we sell couches against, many of them have significant brand awareness that drives those businesses with very little advertising.

We will achieve that the further we expand this brand, and that’s just--it’s impossible to plan out, but that’s something we very much expect..

we have a long runway to acquire customers just with showroom growth; and number two, every time we open a showroom, we get a 2% increase in our ROI on marketing.

There’s a real virtuous circle there that will continue to help us drive efficiency in marketing that probably isn’t as obvious externally right now, but we’ll see huge advantages in the next 24 months..

Great, thank you so much..

Our next question is from the line of Dave King with Roth Capital. Please proceed with your question..

Thanks, morning everyone.

First on the 40%-plus growth implied for Q4, how much of that is transaction versus AOV growth, and then how much are you planning to grow marketing to get that revenue?.

I can tell you a couple things. If you look at our--I’ll give you our year-over-year marketing [indiscernible] from the last three years.

So year-over-year, ending last year, our marketing grew from $9 million to $18 million, so that was 100% year-over-year This year, we’re going from $18 million to $30 million, so it’s approximately a 60% growth year-over-year.

We have growth that’s higher than--our marketing spend growth right now is at a higher rate than our total top line growth; however, as you can see from those numbers, the rate of increase is decreasing and we expect to see that continue to decrease, so we do see an endpoint where we get the efficiencies.

We will see an increase approximately--I’d say it’s going to be about 50% to 60% in marketing increase in the quarter over last year, and we’ll see very strong growth..

And then on the transaction versus AOV, do you have what--.

Yes, so I don’t want to give you the details and the numbers in terms of go forward, because now we’re splitting a quarter. I can tell you for year to date, we are roughly at--we’ll be about in the mid teens in transaction increases and approximately 20% in AOV..

Okay, that helps. Then as a follow-up on the marketing front, how are the ROIs and efficiencies on the marketing these days? Are the TV ads still performing to your liking? What’s working? Is there anything that isn’t working? Just some color there, I think would be helpful. Thank you..

Yes, I think right now, ROIs have been relatively stable. We’re not seeing a decrease or necessarily an increase.

I think there’s two sets of--you know, there’s headwinds in pricing and competition in terms of cost, and there’s tailwinds in terms of building out our showrooms, so we expect as we go forward for the next 12 months to be looking at pretty stable ROIs based on different combinations.

Dave, also I would say we’re roughly--this year, we’re roughly spending at the 12% of marketing--12% of net sales.

That will possibly go up just a little bit, but we’ll talk about that in the future, but we don’t see any dramatic changes in terms of--the rates of marketing will not increase faster than the rate of sales in terms of the future as we go forward. .

Okay, and then on the ROIs, them being stable, are those still consistent with the numbers you laid out, I think when you--around the timing of the IPO, in terms of--.

Yes, we’re very pleased, and to put it into more detail, I think the subtlety there is that if you look at the market right now, just about everybody is advertising around those big furniture periods, right, and they’re mostly digitally advertising or the classic furniture companies are promoting a thousand dollars off, etc.

Our awareness of our branded advertising has no promotion mention in it, it’s not promotional advertising at all, so what we’re really talking about is a distinction between creating brand awareness, which we believe is absolutely critical in the long run, creating a more efficient way to create brand awareness, and separating that activity from the conversion activity that is really around those key furniture buying periods and driven by digital.

We will certainly continue to heavily invest our digital around those periods, but what we’re finding is that by creating brand awareness where there’s less promotional noise, we can get some pretty high ROIs year round, and in fact it makes us feel really good about next year because instead of focusing all of our media and our analysis on 14 to 18 weeks, we’re looking at 52 weeks and looking at really being subtle about how we manage our brand building aspect of our business, relative to our conversion or our promotional aspect of the business.

That’s why it’s hard to understand what we’re saying and our excitement is.

I think as we roll out for next year and we talk about our annual plans, it’ll be a lot clearer, but we’re seeing an always-on opportunity in brand awareness which allows us to really manage costs and manage around the competition in ways they can’t, because they’re so promotionally dependent..

Okay, that’s very helpful. Thanks for taking the questions, and good luck with the rest of the year..

Thank you..

Thank you. The next question is from the line of Alex Fuhrman with Craig Hallum. Please proceed with your question..

Great, thanks very much for taking my question. I wanted to ask about the attach rate on the Power Hub and the storage seat that you’re seeing. Those were certainly very impressive numbers.

Can you give us a sense of when that really started to pick up, and have you been marketing pretty aggressively to former customers to get them to come back in and get the Power Hub? Just curious how long we should expect to see that lift in average order value. .

Good question. I would expect--we have not really been spending--I would say we haven’t been doing an over aggressive marketing program with those items.

We certainly market to our installed customer base, obviously via direct mail and catalogs, etc, so they’ll be aware of it, but we don’t see any reason for that attachment rate at this point to go down. Now, it’s very early, but based on what we’re seeing, we expect to build that into the business model for the next year. .

Okay, that’s really helpful. Thanks. If I could just ask a question on the mechanics of the Q3 numbers here. Comparable showroom sales were up very nicely, close to 30%, which was more than the increase in showroom revenue.

Can you give us just the summary on how comp store sales have been higher that showroom revenue for this quarter? Is this just the timing of when stores have entered the comp base or something like that?.

Exactly, it’s all comp base. It is absolutely 100% driven by timing of the comp base.

If you were to--and obviously we have, as we look at our new showroom opening run rates, they’re as strong as they’ve ever been, so we’re extremely excited about especially our new, some of our off-mall openings having extremely high run rates, so it’s primarily a shift. .

Okay, thank you very much..

Thank you. We have reached the end of the question and answer session. I’ll now turn the call over to management for closing remarks. .

Shawn, you want to take this?.

Yes. Thanks so much for joining us today, and we appreciate all of the great questions. Once again, thanks to all the Lovesac family for your hard work, and we are very excited about fourth quarter and moving into next year and continued growth. Thank you. .

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