Lovesac being cautious as consumer face headwinds: CEO

Home furnishing company Lovesac (LOVE), posted a 14.3% year-over-year growth in net sales and 36.3% year-over-year rise in gross profit in the third quarter. Shawn Nelson, Lovesac CEO, joins Yahoo Finance to discuss what is ahead for the company.

Nelson shows caution heading into next year, saying it "is still a bit unknown," though he does say "we will end [the year] with probably the highest growth in our category, which, of course, we're very proud of."

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Video Transcript

- We're getting a major labor market download this weekend. The reports so far show a significant loosening in the once tight job market. As job openings decline, more consumers may be inclined to pinch their pennies in the coming months.

So how is this impacting big ticket consumer discretionary businesses? We heard from retailers like Lowe's and Best Buy a few weeks ago that big ticket purchases are falling but home furnishing brand Lovesac is still seeing category outperformance. Lovesac reported a 14% increase in net sales in its third quarter and says that it is pleased with the start of the holiday season. We've got with us here today Shawn Nelson, Lovesac CEO, with us to discuss these results. Shawn, great to see you. We'd love to dive into what you're seeing this quarter and how you would describe the consumer right now.

SHAWN NELSON: Yeah, look, it's a mixed bag in the sense that I think that we're all watching the same news, the world has all sorts of chaotic elements at the moment. And I think that people, we call them consumers, but people, in general, sometimes feel a bit nervous and worried about these high interest rates, have a hard time figuring out what their next move is. If they need to move, it's hard for them to sell their homes, et cetera.

So I think there's a lot of money on the sidelines right now. I think there's a lot of people who feel nervous in general. At the same time, the world marches on. I learned this back in 2008, '09, '10, still in the home furnishings business, even way back then, Lovesac grew and grew through that recession. Because while business curtailed 10%, 20%, let's say, generally, the other 80% still marches on.

And I think that's in a way. What's happening now. It's unique for the home category because we're experiencing a big hangover after COVID. But then again, it's unique for Lovesac because we've been on such an uptick as we've built the brand over these past few years very intensely and had a lot of success. So we're kind of a standout in our category-- but-- which is, again, experiencing severe headwinds, the home category in general, as you just mentioned. But we're glad to be doing OK.

- So Shawn I want to ask you about-- so you had some double digit growth there, especially when you look at your revenue number in your latest quarter and your outlook for Q4 and for 2024. In particular, I want to hone in on 2024, it looks strong. You're projecting net sales in the range of 710 to 720 million for fiscal year 2024. What are the assumptions that are behind that projection?

SHAWN NELSON: Yeah. So our fiscal 2024 is the year that's ending in let's say 60 days from now because we're on that January end calendar. But looking beyond that to the following year, which is what I'm guessing you're asking about, is still a bit unknown. We haven't put out guidance for the coming year. We do expect growth for the year in balance, we will end with probably the highest growth in our category, which, of course, we're very proud of.

At the same time, it's our lowest growth in quite a while because before this, I think, we were on an eight or nine year KGR above-- between 30% and 40% growth. It's just been a tear for Lovesac as we've built the brand. But-- you know so this is a softer year for us, but a strong year for the category-- versus our category.

So in the balance of year, look we're being cautious on the consumer through the holiday. We had a great Black Friday, for sure. But there's just a lot swirling in the world. So we're maintaining a lot of caution in general.

- Shawn we've come a long way. The business is coming a long way since the days where you and I were actually sitting on Lovesacs in Times Square just kicking back chatting. And this was before the company even went public.

You think to how the business has grown out now and some of these new product initiatives that we've heard you talk about whether it's angled sides, whether it's partnerships with Microsoft's Xbox, at the end of the day. How are you seeing consumers gravitate towards the different products that Lovesac is pulling out now? And is there, kind of, a sweet spot within that new type of demographic, the consumer that you're seeing come into the brand?

SHAWN NELSON: Absolutely. Look Lovesac is a leader in innovation. And we don't do a ton of things but the things we do, as you can see, are very innovative, got complete embedded surround sound system, charge your phone invisibly all hidden inside of our couches, no one has that. Patented by Lovesac.

As we continue to put out new products that allow people who bought their Lovesac couch pieces, their sectionals, let's say even years ago, like when we met, to add the angled side on, to add stealth tech on, it's very satisfying.

And, look, it pays off to that sustainability minded consumer who whether or not they are recycling themselves, it makes them feel good to know that they've bought something that has real value and that can be sustained hyphen a bowl a product that can actually last and last and as innovation comes out does not obsolete it. And I think, in that way, we're flying in the face of so many tech companies, so many product companies that engineer things to fail. We're going the opposite direction and I think that's a big part of our success.

- So Shawn we had this internal chat about some serious subjects. And of course, the song popped up in our conversation yesterday. You know what song.

SHAWN NELSON: Song.

- Loveshack. Yes. I'm not going to sing it. I'm not going to sing--

SHAWN NELSON: Sing it.

- No because-- I'm not going to sing it. But what it does bring-- you sing it. No. What it does bring up for us is this question about your marketing and/or discounting strategy that you may have to employ as you think about how consumers are becoming more discretionary and pinching pennies and deciding where they're going to spend their dollars. Are you having to make any changes with regard to your marketing and/or discounting strategy?

SHAWN NELSON: The broadly at retail right now discounts are extremely high, especially in the home category where you have many firms struggling to keep up with growth at this time. That's certainly affects us. We certainly are navigating that surgically.

Our sales come from a built up pipeline of customers who are interested in our products because they are so unique, right. Like there's nothing quite like our products. And most of them are patented, you can't find anything exactly like it. So thankfully, we discount less than all of our peers that we're observing.

We've driven our gross margins up by 900 basis points this last quarter. I mean they're in the-- they're in the high 50s which for our category is extremely-- highest in the category, I think. And thankfully, we've been able to walk that knife's edge. We are discounting more this season than we were last year but less than our peers. And I think broadly. That's the nice edge we hope to continue to walk on. At the same time, we do expect that promotional environment to continue to be aggressive throughout the balance of this year through January for us.

And even on into next year, I think look there's a lot of headwinds to the home category right now from this post-COVID hangover. We don't deny that. In fact, it's, by what we can observe, worse than 2008-9-10. Again, thankfully Lovesac has built its brand in a way that gives us momentum to grow through this even as it's tougher than it was before.