Q3 2024 Lovesac Co Earnings Call

Participants

Elizabeth Schnoerr; IR; ICR

Shawn Nelson; Chief Executive Officer, Director; Lovesac Co

Mary Fox; President & COO; Lovesac Co

Keith Siegner; Chief Financial Officer, Executive Vice President; Lovesac Co

Maria Ripps; Analyst; Canaccord Genuity

Brian Nagel; Analyst; Oppenheimer & Co., Inc.

Matt Koranda; Analyst; Roth MKM

Alex Fuhrman; Analyst; Craig Hallum

Thomas Forte; Analyst; D.A. Davidson & Company

Presentation

Operator

Greetings, and welcome to love sacks Third Quarter Fiscal 2024 earnings conference call. (Operator Instructions) Please note that this conference is being recorded. At this time, I'll turn the conference over to Elizabeth Schnoerr. Ms. Schnoerr, you may now begin.

Elizabeth Schnoerr

Thank you. Good morning, everyone. With me on the call is Shawn Nelson, Chief Executive Officer; Mary Fox, President and Chief Operating Officer; and Keith Siegner, Chief Financial Officer.
Before we get started, I would like to remind you that some of the information discussed will include forward-looking statements regarding future events and our future financial performance. These include statements about our future expectations, financial projections and our plans and prospects. Actual results may differ materially from those set forth in such statements for a discussion of these risks and uncertainties, you should review the Company's filings with the SEC, which includes today's press release. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today, and we undertake no obligation to update them, except as required by applicable law.
Our discussion today will include non-GAAP financial measures, including EBITDA and adjusted EBITDA. These non-GAAP financial measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. A reconciliation of the most directly comparable GAAP financial measure to such non-GAAP financial measure has been provided as supplemental financial information in our press release.
Now, I would like to turn the call over to Shawn Nelson, Chief Executive Officer of The Lovesac Company.

Shawn Nelson

Thank you, Liz. Good morning, everyone, and thank you for joining us today. I'll start this call off by reviewing the highlights of our third quarter fiscal 2024, briefly providing an update on our operational accomplishments and finishing up with our outlook. Then Mary Fox, our President and COO, will update you on the progress we made against our strategic initiatives. And finally, Keith Siegner, our CFO, will review our financial results and a few other items related to our outlook in more detail.
Turning to the highlights of our results. Not a lot has changed since we spoke with you four weeks ago. Lovesac continues to deliver strong financial results and category outperformance backed by a very strong balance sheet. For third quarter, we're pleased to confirm top and bottom-line results that were in line with the outlook provided on our second quarter call on November 3. The headline is that third quarter net sales grew double digits in a double-digit negative category.
To be clear, the macro backdrop largely remains the same as last month. Lingering macro uncertainty leads to consumer caution and pressure on the furniture category, which we estimate was down mid to high teens in the third quarter. However, our playbook also remains largely unchanged and continues to deliver. Our disruptive designs for life platforms, impactful product innovation, compelling marketing, and highly productive omnichannel footprint continue to distinguish our unique brand and engender customer loyalty.
More specifically, for the third quarter, total net sales were $154 million, up 14.3% versus the prior year period AND 32% on a two-year basis. Omnichannel comparable net sales growth was 2% for the quarter, a key metric for how we evaluate and manage our unique omnichannel business. We delivered gross margin expansion and substantial abatement in SG&A deleverage as expected, which led to materially improved profitability compared to the third quarter of fiscal 2023.
Adjusted EBITDA reached a positive $2.5 million compared to a negative $6.9 million in the prior year period. Net losses also improved to $2 million compared to a net loss of $7 million in Q3 last year, and that's despite non-recurring expenses related to the restatement that are called out in our press release.
The Lovesac team continued to execute across all our priorities, including our innovation agenda, physical footprint expansion, omnichannel experience from order to delivery, and marketing efficiencies. Mary will discuss in more detail the progress of these growth strategies in a moment.
As we look to the final quarter of the year, which includes the all-important holiday selling weeks, I'd like to note the following. The macro environment and in turn the discretionary home category has remained challenging. As we said on our last call, we are not planning for any meaningful recovery in category growth in the near term.
And yes, as expected, the promotional environment was more competitive over the Black Friday and Cyber Monday periods than last year. But as we discussed with you last month, we adapted our plans, increasing the discount slightly, and delivering relevant and distinctive marketing with strong gross margins to boot. Taking all that into account and with the Black Friday and Cyber Week events behind us, I'm happy to say that Lovesac has continued to grow and outperform the category.
As a result, we are further tightening our full-year net sales guidance range now of $710 million to $720 million, which represents high single to nearly double-digit growth, even excluding the impact of the 53rd week this year. A truly standout performance.
We are not ready to provide guidance for fiscal 2025 today. However, we will prudently control expenses and with a focus on efficiency, balanced against proactive investments in new products to drive profitable growth.
In summary, we are pleased to deliver third-quarter results that were in line with our expectations, and which once again are ahead of the competition. The operational progress we are making against our growth strategies, along with disciplined investments in key foundational areas like technology, new product innovation, and insights continue to fortify our flywheel, thereby driving consumer demand and expanding our market leadership, which we believe can last well into the future.
Finally, I want to thank the entire Lovesac team for their tireless execution of our strategies and delivery of our goals, especially during this critical time of year. Our disruptive model enables us to continue to grow, thrive, innovate, and invest in this business. But it is our people who ensure an outstanding customer experience and are the reason that our Lovesac family is growing so steadily as we enjoy a great holiday season together.
With that, I will hand it over to Mary to cover our strategic priorities and progress in more detail. Mary?

Mary Fox

Thank you, Shawn, and good morning, everyone. As Shawn discussed, with sales growth of 14.3% of quarter three results, again reflected industry leading growth driven by our unique omnichannel business model. Importantly, on a full-year basis, our sales were up 196% from pre-pandemic levels and our adjusted EBITDA margin has increased 880 basis points over the same time period.
Category outperformance has continued this quarter with strength in demand versus last year during [cyber side] from Black Friday through Cyber Monday, and we are very pleased with our early results. Some highlights from cyber side include having our two largest sales days and the largest week in our history. We believe this peak in sales that is unique to our business within our category is due in part to our investment in building a brand that is unmatched in the furniture category, coupled with delivery to customers' homes in just a few days.
Our clear strategy for growth and the team's consistent execution against our growth strategies allows us to continue to fuel our flywheel and drive operational excellence across the business. I will now share the highlights of our operational progress in quarter three.
Firstly, starting with product innovation. During quarter three, we expanded distribution of our newly launched angled side, which is now available across our showroom base as well as our e-com platform. And we're very happy with the impact and feedback. Angled side performance is even above our original expectations, which were ambitious, emphasizing how it is a meaningful driver of our overall continued growth and category outperformance.
As I said before, we partnered with Architectural Digest to launch angled side to the consumer and design a world. The event was well attended by influencers as well as media outlets such as Vogue and glamour. And of course, Architectural Digest. In addition to generating over 1 billion impressions. The event was surrounded by Architectural Digest paid media, further powering the success we've seen since launch. In short, we're very happy with the early performance of angled side as it's approaching becoming Lovesac's number one style choice after only a few months.
We're also launching some strong collaborations into the holidays, including a partnership with no instruments of update to develop a full stack that will be featured within Nordstrom and nordstrom.com this holiday. We continue to demonstrate that we will gain market share through our new product introductions and brand collaborations. As awareness and appreciation continue to grow, all of which reinforce the strength of our customer-centric business model.
Our omnichannel experience. This model is driven by a combination of our physical touch points in our digital platform. During third quarter, we opened 10 showrooms and 16 Best Buy shop-in-shops. With regards to our Best Buy partnership, sales were up 42.8% in quarter three, driven by increased shop-in-shop presence versus last year.
Our e-commerce channel performance continued to show strong growth and increased 20% to last year and contributing meaningfully to our category outperformance. Our omnichannel model and investments into touch points and website technology continues to drive improved customer satisfaction scores as we continuously monitor feedback and improve the overall customer shopping experience.
We made significant improvements to the website shopping experience before entering our holiday code freeze, including new configurators to ease the customer rebuy journey, update the post-purchase experience, and platform security enhancements. Strong collaboration across touch points and e-commerce enable us to continuously improve the omnichannel experience.
Third is our brand ecosystem.At the center of our ecosystem lies our efficient marketing and effective driving brand awareness, familiarity love and ultimately customer acquisition, which supports our strong customer lifetime values, the customer acquisition cost ratio. Overall, we continue to be agile with our marketing mix. As the backdrop for customers' interaction with our category continues to change.
Let me share a few highlights of what we've been working on for awareness, more broadly, increasing efficiency and achieving reach enabled us to drive rate and also improved targeting simultaneously live sports upfronts are a key example of this improvement while on this subject Hopefully you all have seen our newest commercial that tested very strongly across all metrics.
We continue to closely scrutinize digital marketing program optimizations to our SEM and social program, which have driven improvements in our overall ad exposure and cost metrics, along with improving conversion rates and ROI.
We've had strong success with some social partnerships that reinforced the resonance of our brand with culture. Charli D'Amelio posted from her new home unless that product she requested. And as you know, she has more than 151 million followers on TikTok and over 9 million YouTube subscribers. We collaborated with Justin Pugh on a special fact when his Saturday Night Football intro restaurants straight off the couch. And these two collaborations garnered over 35 million impressions and are just a few examples of the work our team is doing, building brand love and stickiness and not to be forgotten direct mail campaigns once again delivered strong ROIs for us and not only drove customer acquisition, but aided increasing lifetime value of our customers.
Lastly, we are really excited to see the Esquire named StealthTech one of its best 37 gadget for 2023. Yes, that is right to calculate the best gadget list, reinforcing the strength of design for life products powered by technology.
And finally, disciplined infrastructure investments and efficiencies. During quarter three, we continued to make investments in technology and research and development as we scale our business for the long term. We completed the national rollout of Project Spring, our new POS system in all of our touch points. This rollout enhances the customer experience through speed of transactions and unlocks new modern payment options like pay by Link capability.
Our quick delivery continues to drive customer satisfaction. And our investments in supply chain, which we remain on track to deliver by the end of this year are expected to help drive inventory productivity improvements of 20%. As we have previously stated, as mentioned last quarter, we continue to make progress on our second operations and open box inventory as we focus on improving the executional effectiveness and brand experience. And we are seeing over 48% improvement in units back to stock versus last year.
As a result of these initiatives, we expect to see improvements in working capital as well as associated cost reductions across inbound freight and warehousing, which we saw in quarter three and we'll continue to realize in Q4. Investments in gladly, our customer service platform has allowed us to better serve customers as part of our sales and service strategy, driving over 8 points of increase in C love customer satisfaction scores in quarter three over the same quarter last year and an impressive increasing service performance versus last year during cyber side.
We are laser focused on operational excellence, and we will continue to manage our cost structure and capital allocation as we deliver operational performance ahead of our competitors.
In summary, we are pleased with our results for the third quarter and our continued and consistent track record of market share gains. I want to echo Shawn's gratitude to our amazing team members for helping drive these financial and operational outcomes. For the big holiday weeks that we just covered and the ones to come, one thing that is certain is that we are ready for them and look forward to closing out our fiscal year having built on our market share gains, expanded our physical footprint with highly productive locations, improved our digital go-to market position, made important infrastructure investments, and doing all of this, while advancing our innovation agenda.
I will now pass the call over to Keith to review our third quarter results and our outlook for the fourth quarter. Keith?

Keith Siegner

Thanks, Mary. Let's jump right into a quick review of the third quarter, followed by our outlook for the rest of fiscal '24.
Net sales increased $19.2 million or 14.3% to $154 million in the third quarter of fiscal 24, with the year-over-year increase being driven by web and showrooms. This was in line with what we projected for the quarter, driven by our 25th anniversary celebration and the launch of angled side.
Showroom net sales increased $15.7 million or 18.9% to $98.7 million in the third quarter as compared to $83 million in the prior year period. The increase in showroom sales was driven by an increase of 2% in omnichannel comparable net sales growth related to higher point of sale transactions with higher promotional discounting than the prior year, as well as the net addition of 41 net new showrooms compared to the prior year period.
You'll notice that beginning this quarter, we've replaced previously provided comparable sales growth metrics with a new metric, omnichannel comparable net sales growth. This is the metric most closely aligned with how we evaluate and manage the financial performance of our omnichannel business. It also eliminates noise cost through the inclusion of demand-based metrics in the past such as orders placed, but that have not been shipped, and should therefore be far more useful for new models.
Internet net sales increased $6.7 million or 20.1% to $40 million in the third quarter of fiscal '24 as compared to $33.3 million in the prior year period. Other net sales which include pop-up shop, shop in shop, and open box inventory transactions decreased $3.1 million or 17.1% to $15.4 million in the third quarter of fiscal '24. The decrease was principally due to a lower open box inventory transaction level, only $2.5 million compared to $4.2 million in the third quarter fiscal '23.
Our open box inventory transactions with [ICON] are a part of our circular operations, design for life, and ESG initiatives. As we discussed last quarter, these transactions are waning in materiality as our initiatives to optimize our process for return product kick in. This better aligns with our sustainability goals and should retain more profits for Lovesac at the same time. We may engage in limited open box inventory transactions with ICON going forward to ensure that our warehouses are operating as efficiently as possible.
By product category in the third quarter, our Sactional net sales increased 18%. Sac net sales decreased 10%. And our other net sales, which includes decorative pillows, blankets, and accessories, decreased 15% over the prior year. Gross margin increased 920 basis points to 57.4% of net sales in the third quarter versus 48.2% in the prior year quarter, primarily driven by a decrease of 1,070 basis points in total distribution and related tariff expenses. This was offset partially by 150 basis points of pressure from higher promotional discounting.
The decrease in total distribution and related tariff expenses over the prior year is principally related to the positive impact of 1,160 basis points decrease in inbound transportation costs, partially offset by 90 basis points in higher outbound transportation and warehousing costs. SG&A expense as a percent of net sales increased by 420 basis points in the third quarter or half the deleverage seen in the second quarter. The deleverage was primarily due to deleverage within employment costs, selling-related expenses tied to the Lovesac credit card, continued investments to support current and future growth, and also professional fees.
In dollars, overhead expenses increased $10 million, consisting mainly of increases of $6.3 million in professional fees and $3.7 million in infrastructure investments in other miscellaneous items. Employment costs increased by $2.9 million, primarily driven by an increase in new hires in fiscal '24. Selling related expenses increased $1.5 million, principally due to credit card fees related to the increase in net sales and an increase in credit card rates.
We estimate non-recurring incremental fees associated with the restatement of prior period financials was approximately $1.7 million in the third quarter. Advertising and marketing expenses increased $2 million or 10.8% to $21.1 million for the third quarter of fiscal '24 compared to $19.1 million in the prior year period. Advertising and marketing expenses were 13.7% of net sales in the third quarter as compared to 14.1% of net sales in the prior year period.
Operating loss for the quarter was $3.6 million compared to operating loss of $10.1 million in the third quarter of last year, driven by the factors we just discussed. Before we turn our attention to net loss, net loss per diluted share and adjusted EBITDA, please refer to the terminology and reconciliation between each of our adjusted metrics and their most directly comparable GAAP measurements in our earnings release issued earlier this morning.
Net loss for the quarter was $2.3 million or negative $0.15 per diluted share compared to a net loss of $7.4 million or negative $0.48 per diluted share in the prior year period. During the third quarter of fiscal '24, we recorded an income tax benefit of $1 million as compared to $2.8 million for the third quarter of fiscal '23. The change in benefit is primarily driven by the reduction in net loss for the quarter.
Adjusted EBITDA for the quarter was an income of $2.5 million as compared to adjusted EBITDA loss of $6.9 million in the prior year period. Adjusted EBITDA for the third quarter was ahead of our expectations, principally driven by the upside to gross margins.
Turning to our balance sheet, our total merchandise inventory levels are in line with our projections and have leveled out as we discussed on our prior call. This is despite the addition of angled sides queues and we believe this is a clear highlight of the uniqueness of our business model. We feel exceptionally good about both the quality and quantity of our inventory and our ability to maintain industry-leading in-stock positions and delivery times.
We ended the third quarter with a very healthy balance sheet, inclusive of $37.7 million in cash and cash equivalents, as well as $36 million in availability on our revolving line of credit with no borrowings. Please refer to our earnings press release for other details on our third quarter financial performance.
So now our outlook and let's start with the fiscal fourth quarter. We estimate net sales of $260 million to $270 million. We expect adjusted EBITDA between $48 million to $56 million. This includes gross margins just under 60%, merchandising and advertising of 10.5% to 11% as a percentage of net sales, and SG&A of 31% to 32% as a percent of net sales.
We estimate net income to be $29 million to $33 million. This includes approximately $1.5 million of non-recurring incremental expenses associated with our restatement of prior period financial statements. We estimate diluted income per share is expected to be $1.77 to $2.2 with $16.6 million diluted weighted average shares outstanding.
Now for the full year fiscal 2024. We are tightening the range of our full-year outlook for net sales to $710 million to $720 million. We expect adjusted EBITDA between $54 million and $62 million. This includes gross margins of 57% to 57.5%, merchandising and advertising of approximately 13% as a percentage of net sales, and SG&A of approximately 38% as a percentage of net sales.
We estimate net income to be between $22 million and $26 million. This fiscal 2024 estimates include $4.5 million to $5 million of non-recurring incremental expenses associated with our restatement of prior period financial statements. We estimate diluted income per common share in the range of $1.35 to $1.60 and approximately $16.5 million estimated diluted weighted average shares outstanding. As a reminder, the 53rd week in the fourth quarter is expected to contribute approximately $6 million in net sales.
Quickly on our cash balance outlook, we were very pleased to have reported such a strong cash position for the third quarter, which is typically our lowest quarter ending cash balance of the year given the inventory build ahead of the strong holiday sales period. As we monetize inventory through the busy season, we continue to estimate we will end fiscal '24 with a higher net cash balance than we ended fiscal '23.
So in conclusion, we're pleased with our third quarter results and how early holiday sales have supported the continuation of competitively superior results as it is reflected in our outlook, market share gains, strengthening foundations, exciting new growth drivers, and a healthy balance sheet put Lovesac in an enviable position. The more I get to know the teams, the more excited I get about our collective commitment to optimizing the opportunity ahead of us. With a strong focus on growth, underpinned by an ROI-based approach to measured reinvestment, I'm confident in the outlook.
Now I'll turn the call back to the operator to start our Q&A session.

Question and Answer Session

Operator

(Operator Instructions) Maria Ripps, Canaccord Genuity.

Maria Ripps

Good morning and thanks for taking my questions. First recognizing that it's still pretty early and you're not guiding to next year, but maybe can you talk about sort of your current expectations for the category growth and consumer demand next year? And what kind of macro assumptions are embedded in your sort of internal forecast for next year?

Mary Fox

Hey, Maria. And luckily, we hear from you for the question. Yes, obviously, we are fully focused on Q4. And this all important. Holiday season, we'll share more when we come through to our earnings for quarter four.
In terms of plan for next year we still anticipate the macro environment will be choppy and the cash will be remaining challenging, and we have planned that way. But as we've done now, so this year, last year, we continue to obviously, really outperform the category really driving tremendous growth.
And I think just so much of that goes back to the fact co-brand Frank continues to just really grow. I think, you know, our customers even just being asked in showroom last week, they just love the brand. They believe in design for like Sina. We're plan continue to be pragmatic students in terms of our investments with obviously a deep focus on ROI. And but obviously, as soon as that thing turns, as you know, we hope it will as the category starts to improves. That will be the ones that will be the fastest to be able to chase into that growth we saw through COVID as we feel good and obviously, that's the advantage of our supply chain.

Keith Siegner

Maria, this is Keith. Just to just to add to that a little bit. I mean, that's one of the really, really alluring aspects of this business model to me because of our approach, not being merchandise led but primarily selling seats and sides and Sax with the various covers our ability to scale up with upside surprises to the macro. It's really advantageous from, you know, starting from a position of shipping in less than two weeks, even if we needed to potentially extend a tiny bit in order to if it was, it was a really material upside macro, surprise we could do so. So we sort of retain the ability to participate in upside macro surprises in a way that I think is sort of unmatched.

Maria Ripps

Got it. That's helpful. And then secondly, sort of you've made a lot of progress on gross margin expansion over the past couple of quarters. Can you maybe talk about your philosophy around preserving that margin versus maybe passing on some of the savings to the consumer to drive volumes, especially kind of here in the near term in this macro-environment?

Keith Siegner

Sure. I'll start off on this one. So we've been we've been really pleased with this, and there's a whole host of factors behind it that we walked through on the call are that I walked through in the call earlier. And you could see as we get into fourth quarter with the guidance that we gave, they were looking for continued gross margin expansion through the fourth quarter. Let's call it heavily rounded half the benefit year over year that we saw here in the third quarter.
But I think I would say this. We've sort of settled into where we think is a healthy range for us. It barring any material shocks, whether it's on inbound freight or outbound freight. There's always potential for some type of systemic shock. But barring anything like that, I think we feel pretty good about this. Then what it becomes for us is a balancing act across pricing, across promotions, across managing all of those inbound and outbound freight cross plus how we leverage our marketing and our ineffective promotions we offer through the financing through Lovesac credit card.
So put it altogether, I think these feel like pretty sustainable and healthy levels for us. Again, barring any systemic shock.

Maria Ripps

Got it. Thank you for the color.

Operator

Brian Nagel, Oppenheimer.

Brian Nagel

First question I want to ask, and I think it's a bit of a follow-up to that, the prior gross margin question. You mentioned in the comments that we've heard this elsewhere through the notes, it's more promotional out there. Companies is more virtual backdrop. So I guess the question I have is with regard to gross margins. As we look at the results we've put up today for Q3 and the guidance for Q4, to what degree your consumers react more favorably to price promotions? And how much of a driver gets you to that strategically, how much of a driver of the business is that?

Shawn Nelson

Look, I think promotions is a very powerful tool in our arsenal, especially given our high gross margins to begin with and the competitive nature of our unique products. We tried to be very strategic with them. As you know, we're trying to build the business that's here to stay for a forever, for 50 years. We're trying to build a generational brand and a brand that means something.
And so we have long leveraged promotions. Fairly healthy levels because in this industry, in particular, it's a considered purchase. And so people spend quite a long time, researching products, researching competitors, research our product before they make the decision to purchase. And what we found, especially during the holidays, it's while -- our business spikes as we as we all know, during Q4 and kind of uniquely in our category, let's check.
And we estimate as we look at that, you know, is that or is that a blessing or a curse, but we enjoy the extra business that comes by the exposure being out there in shopping centers. And during this time of year when when there's foot traffic, et cetera. But actually, most of those sales as we observe them and as I observe them in the wild in the front lines and showrooms come from these considered processes where customers are weighing the value. And then frankly, they leverage the holiday season to push them over the edge and make that makes that purchase.
Finally for themselves, it's actually most of the time is not a gift or even related to gifting at system kind of a psychological excuse purchase. And so during this time of year, in particular, the way that we manage promotions is really critical because we have people that have been shopping us maybe throughout the entire year and finally pull the trigger and are waiting to see it might do they might get better, et cetera. So we've exercised, I think, a pretty disciplined hand this season, particularly because it's maybe the most promotional season it's ever been. And at least in recent history, given the given the industry right now. And so our promotions are lower, then what we observe by really any of our competitors.
And as you can see by the numbers, we are competing very robustly. I think we probably have the strongest growth in the category. And so we think we have that right balance of promotion and the healthy fundamentals in the business for the category right now. And the nice thing is should things in the category get worse or just continue to languish. We have a strong opportunity to leverage promotions further to drive the business if necessary. But we're not chasing business to chase business. You know, again, we're trying to balance building a brand that people can love and trust in and have consistency as well as, of course, compete in real time and generate cash and generate profits returns for investors.

Mary Fox

I think, Shawn, just maybe Brian to add a little bit more. I mean, what we see as well is in consumers, they love the deal and excitement to that deal. But it doesn't mean about the lowest price and we've said before, nearly 40% of consumers that come into our brand, they don't even cross upwards with anyone else.
So we feel very good in terms of gross margin, and it being maintained. We have been doing some selective price increases in places as we ladder out, particularly on our more premium sales. And we've seen great performance from that. So we're constantly testing the levers that we have available and you can, from our result gaining huge market shares, outperforming everything else.
Then this algorithm has been working for some we saw from the Goldman Sachs report yesterday, the promotional level, either with high throughput, we had about 40% and at a similar level through November. And we are substantially estimating again, different funds. We do feel good on the gross margins.

Brian Nagel

That's very helpful. Then during my follow-up question on a different topic. So I think as Mary I think you were talking in your comments, it's about, you know, they are highlighting, I guess, the ongoing success of the relationship with Best Buy. So the question I had is I know I know you're a company very guarded about your future plans. I mean, should we expect additionally newer distribution type partnerships with companies like Best Buy to help basically get the Lovesac products out there.

Mary Fox

Before I think either way, we always want to be best-in-class partners where you know that it's really on their minds to be made and how much is the cost because of this has been an incredible promise for FI., particularly the wind farm when a home a tech, there's no one better to partner with them. The best Mark do you want to be with footsteps?
So yes, we've continued to expand the relationship with Best Buy and more to come, and we'll share more obviously at the end of this year. As I said, we are gaining share there, very happy in terms of a chip and want to continue to advance it. And then we're always considering drawn into any other in best-in-class partners that we should be partnering with as you consider the whole ecosystem, whether it be so room, whether it be Costco, I in our own e-com platform, I'm just when should we be and where those footsteps that either always on our mind, strategic, very thoughtful how we do it to ensure that we really drive the rate that we build and consumers expect to find us very helpful routes again, happy holidays.

Operator

Matt Koranda, Roth MKM.

Matt Koranda

Hey, guys, good morning. Thanks for taking the questions. I just wanted to spend back to the Black Friday, Cyber Monday commentary and the holiday commentary in general that you had. Just wondering if you can maybe speak to sort of consumer behavior that you're observing.
One of the things we've seen sort of quarter to date from a number of folks is that consumers seem to be responding to promotions within kind of sitting on their hands between those promotional periods. I'm just curious if that's the trend that you're seeing and then any willingness to sort of quantify the Black Friday Cyber Monday growth? You said? I know you mentioned two record days and a record week, but any further quantification would be appreciated.

Mary Fox

Yes. No, I thank you for the question, Matt. I think 1st of the year, we were incredibly happy with the performance of five, as you mentioned, and from all industry reports. We know we are on the category significantly upon a lot of market share. I think in terms of dynamics, all of our channels contribute to this strong performance it really felt like we were back to 2019 from traffic day rooms, e-commerce growth well into the late evening. And it was great being back in the front line.
We saw consumers coming in and reset. We're very focused in what they wanted to buy. You know, and as we said with you back at the last call a month ago, we're not seeing anything in terms of trade down time or, you know, some trade-up, particularly in the fill, but also just storage in the seats and the other things that really drives that they have a so that continued financing for continued. I think you talked about some people waiting for sure.
And we saw that across the industry with others come out with deals, you know, even earlier than Halloween, we were beta and we promise that we gave them the best deal and we are holding to that. And we did so see a little bit more of that pent-up demand coming, which is obviously, you know, the results that we said. So you can have a from from everything we've done and we've baked all of that performance into our guidance for this year. We decided to wait for Tesla a lot to come, but it was obviously amazing to see the performance and just really reinforcing the spread and just a great job to our team managing those records.
That is, is that our little show room with incredible productivity. It was great and they did an amazing job.

Matt Koranda

Okay. Very helpful, Mary. Thank you. And then maybe for Keith, just on the gross margin, I wanted to attack it from a different angle. So in the third quarter, you had an upside surprise versus sort of the commentary that you had last call. I'm just wondering what drove the upside. And then for the fourth quarter in terms of product margin. Are we baking in a deeper headwind in that [sub 60] outlook that you talked about? Just maybe talking about the bridge, especially as it pertains to product margin in the fourth quarter. Thank you.

Keith Siegner

Yes, sure. So starting with the third quarter and where maybe some of that upside came from, I think it gets back to what Mary was just saying, which is we've been seeing some decent premium upgrades, things like gloves, soft things like storage seats and add-ons along those lines as well as a little bit more shift towards Sactionals within the mix of product versus where we might have been the surgical price increases we've been taking on certain of those products has also been beneficial has not been broad-based or are materially large and there was a price increase, but put the whole package together and that got us a little upside on the quarter.
When you think about Q4, really what's happening is we're lapping some of the abatement of the inbound freight costs that were really pressuring last year. That's why we're seeing less of a year-over-year benefit into Q4. It's more the easing of the tailwind on a year-over-year basis that's causing that deceleration and expansion. You'll notice that like we do get a higher absolute gross margin in Q4 than Q3 because we do get some leverage. The higher sales gives us some leverage over things like warehouse costs and so on and so forth.
But that's why what I was saying earlier was when we think about holistically where we are in gross margins here in these high 50s, this feels like a good level for a full-year basis for us and barring any systemic shocks. I think the way the business is trending, we feel good here.

Operator

Alex Fuhrman, Craig-Hallum Capital.

Alex Fuhrman

Hey, guys.

Matt Koranda

Thanks very much for taking my question and congratulations on a really strong year on you know, Mary, I think you mentioned a couple of times, and Shawn, you touched on as well that you set new records for big days and weeks here during the holiday season so far on you guys have done a really good job historically over the last couple of years of being able to handle those volumes without any kind of shipping delays or anything like that, but can you talk about the profitability of those orders on peak days? Are there any incremental costs that you start to incur when you're operating your peak capacity? And would it be more profitable if there were ways to smooth out demand a little bit more? Yes.

Mary Fox

No, thank you, Alex. Great question. And yes, it was the phenomenal thing. Those record performance is I think, you know, the team had planned for everything.
And as we go through different scenarios and working with all of my partners, we plan for that capacity. So therefore, there wasn't any incremental cost that really came in. So from that side, slightly, to what we plan for and it did a great job moving that through.
I think the second piece, as we think about it and we talked about Project Spring, we completed that full rollout and that's significantly improving the speed of transaction with the when you have five or six customers and Ray on those peak days or even more just having that be and the technology to be able to transact has really helped the web performance. And customers often choose to then convert at home and close the sale that. So again, the rack to the kind of reinforcement of the omnichannel model, but nothing that we see in terms of any profitability impact it was as we planned.

Operator

Thomas Forte.

Thomas Forte

Great. Thanks, Shawn, Mary, and Keith, congrats on the quarter and strong start to the fourth quarter. So two questions. The first one is can you give your updated thoughts on your ability to generate solid free cash flow and your thoughts on what you intend to do with the free cash flow as you advance the model.

Keith Siegner

Absolutely. And o I appreciate the question. Thanks.So we're going to we're looking to provide more details about this with Q4 earnings when we get into the outlook for next year. But I think little bits and pieces of everything we've been talking about are sort of starting to lay the foundations for how we're going to approach this on a go-forward basis, which is as we transition into generating more substantial free cash flow off of seats and sides and sacs. It's how do we how do we appropriately balance the reinvestment into future sales growth drivers with other options for that cash flow.
So we fully anticipate ending this year having been in a cash generative position, new systems and other tools and optimization programs are being put in place all the time. We are going to balance that, as Shawn has said, as Mary and I have said against those future sales drivers, our goal is to, but you translate more of the top line growth to bottom line growth going forward, and that should create more cash flow out of the business which we can use strategically along those balance lines I was just talking about.

Thomas Forte

Thanks, Keith. And then you've pretty consistently generated a lot of market share gains. Shawn, you've talked in the past about your ability to consistently outperform the market at a high teens, perhaps low 20 percentage point rate. I wanted to talk about the source of the market share, do you feel like you're getting market share from the same players or do you think it's changed over time?

Shawn Nelson

Yeah, it's a great question. It's hard for us to know for sure. But our observations on the category, and we tried very hard to stay abreast of every player who sells couches, that's our core business and therefore, any firm that sells couches, we consider a competitor, and we track them all. I think there's kind of in our world, there are two main buckets of competition. And remember, of course, we are operating at a certain price points, but the brand Lovesac stretches across broad, I think fairly broad demographics because we can sell to the very high end customer who had a massive home and is excited to put a 20 seat Sactionals with StealthTech in their basement or entertainment room.
And we can sell to Middle America where this is their main piece of furniture and we pull them up to our price points through the real value that Sactionals create and you know, and so we compete with all of the established brands in home that we may be in the malls that are otherwise. We compete with brand-new startup to kind of copycat the Sactionals format, modularity, et cetera, and tried to mimic that value prop. And so I think that in this environment, we're taking market share from all of them. And as you can see with most of our competitors negative growth and you know, obviously our positive growth and we are certainly taking market share. So I think that it ebbs and flows based on the health of that marketplace. And for instance, I think that in startup land capital is much more dire than it was over the last number of years. And so we they're not spending in necessarily the same ways across the board and again, just chasing growth. And I think the incumbent and have some of their own problems to deal with in this environment where there is still a massive hangover in the home category.
Meanwhile, we have very low and within the category that is the category this category is known for very low, aided awareness and it's very fragmented. And so we are taking market share based on the competitors' unaided awareness. It's hard for furniture brands to gain real brand awareness because consumers buy from Furniture Brands and home brands sporadically and sometimes with years in between. And therefore, as you observed love sacks strategy of building a brand in between leveraging pop culture being in the zeitgeist through celebrity influencer, of course, are very sticky brand names. All of these things give us strength. Whereas, seeing many of our competitors you can't mimic that aspect of what we do and how we do things.
And I think the SEC is a major player in establishing that brand. And so for all these reasons. I think that I think that we certainly are taking market share. It's hard for us to pin down exactly where and where and who it's coming from. And I think that does change based on that state of the category, which also has been in flux recently.

Operator

Thank you. We've reached the end of our question-and-answer session, and I'll hand the floor back to management for closing remarks.

Shawn Nelson

Yes. Thank you so much for joining the LoJack 3Q conference call. For fiscal 2024. We look forward to reporting again at the wrap up of our fiscal year. And we want to just thank investors and all of the hashtag Lovesac family. We're building this brand that we hold so dear.

Operator

This will conclude today's conference. You may now disconnect your lines at this time. Thank you for your participation.