Lovesac Co

NASDAQ:LOVE

Earnings Call Analysis

Lovesac's Q3 Outperforms Despite Market Decline

Lovesac showcased resilience in a tough market, with Q3 net sales rising by 14.3% to $154 million despite a mid to high-teens downturn in the furniture category. The company continued to outperform the market, thanks to its strategic focus on innovation, omnichannel experience, and efficient marketing. Adjusted EBITDA improved from a negative $6.9 million last year to a positive $2.5 million, and net loss decreased to $2 million from $7 million. Lovesac also tightened full-year net sales projections to $710-$720 million, emphasizing controlled growth amid a challenging macro environment and competitive holiday season.

Financial Highlights and Strategic Growth

In the third quarter of fiscal '24, the company experienced a robust increase in net sales, which rose by $19.2 million or 14.3% to reach $154 million, meeting projected figures for the quarter. This achievement was primarily the result of strong performances from both web and showroom channels. Showroom net sales saw an increase of $15.7 million or 18.9% to $98.7 million, attributed to a combination of 2% in omnichannel comparable net sales growth and the addition of 41 new showrooms. Notably, internet sales climbed $6.7 million or 20.1% to $40 million. Conversely, other net sales categories witnessed a decrease, which was mainly due to a fall in open-box inventory transactions. The company has transitioned to utilising omnichannel comparable net sales growth as its primary performance metric, aligning more closely with financial management practices and offering a clearer picture for modeling purposes.

Improving Operational Efficiency and Profitability

The organization reported a gross margin swell of 920 basis points to 57.4%, primarily driven by reduced distribution and tariff costs which more than offset the slight pressure from higher promotional discounting. The marked reduction in distribution and tariff expenses was chiefly due to a significant decrease of 1,160 basis points in inbound transportation costs. Operating efficiency also improved as the operating loss narrowed to $3.6 million from a loss of $10.1 million in the same quarter of the previous year. This positive trend in profitability is underlined by the shift from an adjusted EBITDA loss of $6.9 million to an income of $2.5 million. Net loss also shrank to $2.3 million, which translates to a negative $0.15 per diluted share, an improvement from the net loss of $7.4 million seen in the prior year period.

Robust Financial Health and Inventory Management

The company maintains a strong balance sheet with $37.7 million in cash and cash equivalents and has a revolving line of credit with $36 million available, indicating sound liquidity positions and financial flexibility. Merchandise inventory levels are well-balanced with demand, highlighting the effectiveness of the company's unique business model and its capacity to offer leading delivery times and in-stock positions.

Future Outlook and Revenue Expectations

For the fiscal fourth quarter, the company is estimating net sales to be in the range of $260 million to $270 million. The net income for the full year fiscal 2024 is anticipated to lie between $22 million and $26 million, and diluted income per share is expected to range from $1.35 to $1.60. These projections incorporate nonrecurring incremental expenses associated with the restatement of previous financial statements. The company has also revised its full-year net sales outlook, tightening the range to $710 million to $720 million.

Earnings Call Transcript 2024-Q3

[Operator]

Greetings. Welcome to The Lovesac's Third Quarter Fiscal 2024 Earnings Conference Call. [Operator Instructions] Please note, 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, executive]

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 4 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 Designed For Life platforms, impactful product innovation, compelling marketing and highly productive omnichannel footprint continue to distinguish our unique brand and engender customer love and 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 2-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 nonrecurring expenses related to the restatement that are called out in our press release.The Lovesac team continues 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 period 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 $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, executive]

Thank you, Shawn, and good morning, everyone. As Shawn discussed, with sales growth of 14.3%, our quarter 3 results again reflected industry-leading growth driven by our unique omnichannel business model. Importantly, on a full year basis, our sales are 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 5 from Black Friday through Cyber Monday, and we are very pleased with our early results. Some highlights from Cyber 5 include having our 2 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 3. Firstly, starting with product innovation. During quarter 3, we expanded distribution of our newly launched Angled Side, which is now available across our showroom base as well as our e-comm 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 shared before, we partnered with Architectural Digest to launch Angled Side to the consumer and designer 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 empowering 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 #1 style choice after only a few months. We're also launching some strong collaborations into the holidays, including a partnership with Nordstrom and Swarovski to develop a footsac that will be featured within Nordstrom and on 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 and our digital platform. During third quarter, we opened 10 showrooms and 16 Best Buy shop-in-shops. With regard to our Best Buy partnership, sales were up 42.8% in quarter 3, driven by increased shop-in-shop presence versus last year.Our e-commerce channel performance continued to show strong growth and increased 20% for last year and contributing meaningfully to our category outperformance. Our omnichannel model and investments into touchpoint 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, updates to post-purchase experience and platform security enhancements. Strong collaboration across touchpoints in 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 driver of brand awareness, familiarity, love and ultimately, customer acquisition, which supports our strong customer lifetime value to 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 reach and also improve 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 optimization to our SEM and social programs 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 reinforce the resonance of our brand with culture. Charli D'Amelio posted from her new home on Lovesac 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 sac when his Saturday Night Football intro referenced straight off the couch. And these 2 collaborations garnered over 35 million impressions and are just a few examples of the work our team are 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 were really excited to see that Esquire named StealthTech one of its best 37 gadgets for 2023. Yes, that is right, a couch made the best gadgets list, reinforcing the strength of Designed For Life products powered by technology.And finally, disciplined infrastructure investments and efficiencies. During quarter 3, we continue to make investments in technology and research and development as we scale our business for the long term. We completed the national rollout of PredictSpring, our new POS system, in all of our touchpoints. This rollout enhances the customer experience through speed of transactions and unlocks new and 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 circular 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 3 and will continue to realize in quarter 4. 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 3 over the same quarter last year, and an impressive increase in service performance versus last year during Cyber 5. 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 footprints 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, executive]

Thanks, Mary. Let's jump right in to 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 in 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 caused 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 your 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, Designed 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 nonrecurring 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 Side SKUs, 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 nonrecurring incremental expenses associated with our restatement of prior period financial statements. We estimate diluted income per share is expected to be $1.77 to $2.02 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. These fiscal 2024 estimates include $4.5 million to $5 million of nonrecurring 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 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.

[Operator]

[Operator Instructions] Our first question today is from the line of Maria Ripps with Canaccord Genuity.

[Maria Ripps, analyst]

First, recognizing that it's too 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, executive]

Maria, lovely to hear from you. Thank you for the question. Yes, as obviously, we are fully focused on quarter 4 and this all-important holiday season. We'll share more when we come through to our earnings for quarter 4. In terms of our plans 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 demonstrate our results 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 that our brand's strength continues to just really grow. I think our customers even just being out in the showroom last week, they just love the brand. They believe in Designed For Life. So we're planned to continue to be pragmatic, prudent in terms of our investments with obviously a deep focus on ROI. But obviously, as soon as things turn, we hope it will as the category starts to improve, then we'll be the ones that will be the fastest to be able to chase into that growth. We saw it through COVID, so we feel good. And obviously, that's the advantage of our supply chain.

[Keith Siegner, executive]

Yes. Just -- Maria, this is Keith. 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 sacs with the various covers. Our ability to scale up with upside surprises to the macro is really advantageous. Starting from a position of shipping in less than 2 weeks, even if we needed to potentially extend that a tiny bit in order to -- if 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, analyst]

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, executive]

Sure. I'll start off on this one. So we've been really pleased with this, and there's a whole host of factors behind it that we walked through on the call or that I walked through on the call earlier. And you could see as we get into fourth quarter with the guidance that we gave, that we're 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.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 costs, plus how we leverage our marketing and our ineffective promotions we offer through the financing, through the Lovesac credit card. So put it all together, I think these feel like pretty sustainable and healthy levels for us, again, barring any systemic shock.

[Operator]

Our next question is from the line of Brian Nagel with Oppenheimer.

[Brian Nagel, analyst]

Nice quarter. Nice start to the holiday season. Congrats.

[Keith Siegner, executive]

Thank you.

[Brian Nagel, analyst]

So the first question I want to ask, and I think it's a bit of a follow-up just to that prior gross margin question. So you mentioned in the comments and that we've heard this elsewhere too that it's more promotional out there, it's more of a promotional backdrop. So I guess the question I have with regard to gross margins, as we look at the results you put up today for Q3 and the guidance for Q4. I mean, what -- to what degree your consumers react more favorably to price promotions? How much of a driver -- as you do that strategically, how much of a driver of the business has that become?

[Shawn Nelson, executive]

Yes. 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. We're -- as you know, we're trying to build a business that's here 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 at 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, is while we -- our business spikes, as we all know, during Q4, kind of uniquely in our category. Lovesac, and sometimes we look at that, is that a blessing or a curse? But we enjoy the extra business that comes by the exposure being out there in shopping centers during this time of year when there's foot traffic, et cetera. But actually, most of those sales, as we observe them and as I observed them in the wild on 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 purchase finally for themselves. It actually, most of the time, is not a gift or even related to gifting. It's just kind of a psychological excuse to 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 if 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, at least in recent history, given the industry right now. And so our promotions are lower than what we observed 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 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. Again, we're trying to balance building a brand that people can love and trust and have consistency as well as, of course, compete in real-time and generate cash and generate profits, returns for investors.

[Mary Fox, executive]

I think, Shawn, just maybe, Brian, to add a little bit more. I mean, what we see as well is consumers, they love the deal and the excitement to that deal, but it doesn't mean about the lowest price. And we've shared with you before nearly 40% of consumers that come into our brand, they don't even cross-up us with anyone else. So we feel very good in terms of gross margins kind of being maintained. We have been doing some selective price increases in places as we have ladder out particularly on our more premium fills, and we've seen great performance from that. So we're constantly adjusting the leases that we have available.And as you can see from our results, gaining huge market shares outperforming everyone else, then this algorithm has been working for us. We saw from the Goldman Sachs report yesterday, the promotional level was high through quarter 3 at about 40% and at a similar level through November, and we are substantially lower. So I think, again, just [indiscernible] but we do feel good on the gross margins.

[Brian Nagel, analyst]

That's very helpful. My follow-up question, different topic. So I think it was Mary, I think you were talking in your comments, it's about the -- or highlighting, I guess, the ongoing success of the relationship with Best Buy. So the question I have is, I know you're always as a company very guarded by your future plans. But should we expect newer distribution type partnerships with companies like Best Buy to help basically get the Lovesac products out there?

[Mary Fox, executive]

Yes. No. Well, before, I think where we always want to be is best-in-class partners where consumers, it's really on their mind to be [indiscernible] purchase. So Costco has obviously been an incredible partner for us. Best Buy, particularly as we advance where home meets tech, there's no one better to partner with than Best Buy [indiscernible]. 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. But we're gaining share. They're very happy in terms of relationship and want to continue to advance it.And then we're always considering, Brian, in terms of any other best-in-class partners that we should be partnering with, as you consider the whole ecosystem, whether it be showrooms, whether it be Costco and Best Buy or on only e-comm platform, just where should we be and where are those footsteps that are always on our minds strategically, but were very thoughtful about how we do it to ensure that we really drive the way that we believe and consumers expect to find us.

[Operator]

The next questions are from the line of Matt Koranda with ROTH MKM.

[Matt Koranda, analyst]

Just wanted to spin back to the Black Friday, Cyber Monday commentary and the holiday commentary in general that you had. Just wondering if you could 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, but then kind of sitting on their hands in 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 that you said. I know you mentioned 2 record days and a record week, but any further quantification be appreciated there.

[Mary Fox, executive]

Yes. No, thank you for the question, Matt. So I think first thing, we were incredibly happy with our performance of Cyber 5, as you mentioned. And from all industry reports, we know we outperformed the category significantly upon a lot of market share. I think in terms of dynamics, all of our channels contributed to this strong performance. It really felt like we were back to 2019, strong traffic to showrooms, e-commerce grows well into the late evening, and it was great being back in the front line.I think we saw consumers coming in that had done their research, were very focused in what they wanted to buy. And as we said with you back in the last call a month ago, we're not seeing anything in terms of trade down. We saw some trade up, particularly in the fill, but also just Storage Seats and other things that really drive up AOV. So that continued financing trend [indiscernible] continued. I think as you talked about, were people waiting? For sure. And we saw that across the industry with others coming out with deals even earlier than Halloween, we were a little bit later. We promised that we gave them the best deal, and we were holding to that, and we did. So you could see a little bit more of that pent-up demand coming, which is obviously the results that we've had.So super happy from, obviously, everything we've done, and we've baked all of that performance into our guidance for this year. We're a 1/3 of the way [indiscernible] still a lot to come, but it was obviously amazing to see the performance and just really reinforcing the brand spread and just a great job to our teams. I mean, managing those record days is there are little showrooms with incredible productivity, it was great to see, and they did an amazing job.

[Matt Koranda, analyst]

Okay. Very helpful, Mary. 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. 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 talk about the bridge, especially as it pertains to product margin in the fourth quarter.

[Keith Siegner, executive]

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 Lovesoft, 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. It's not been broad-based or materially large in terms of price increase, but put the whole package together, and that got us a little upside on the quarter.When you're thinking about fourth quarter, 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 in the Q4. It's more the easing of the tailwind on a year-over-year basis that's causing that deceleration in 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]

Our next question is from the line of Alex Fuhrman with Craig-Hallum Capital.

[Alex Fuhrman, analyst]

Congratulations on a really strong year. Mary, I think you mentioned a couple of times, and Shawn touched on as well, that you set new records for peak days and weeks here during the holiday season so far. 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 near your peak capacity? And would it be more profitable if there were ways to smooth out demand a little bit more?

[Mary Fox, executive]

Yes. No, thank you, Alex. Great question. And yes, it was phenomenal seeing those record performances. I think the team had planned for everything, and as we go through different scenarios and working with our last mile partners, we'd plan for that capacity. So therefore, there wasn't any incremental costs that really came in. So from that side, certainly, to what we plan for and the team did a great job smoothing that through.I think the second piece, as we think about investment, we talked about PredictSpring. We completed that full rollout, and that's significantly improving the speed of transaction. So when you have 5 or 6 customers in a showroom on those peak days or even more, just having that speed and the technology to be able to transact has really, really helped web performance, customers often choose to then convert at home and close the sale. So again, just back 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]

Our next question is from Thomas Forte.

[Thomas Forte, analyst]

Great. So Shawn, Mary and Keith, congrats on the quarter and a strong start to the fourth quarter. So 2 questions. The first one is, can you give your updated thoughts on your ability to generate free cash flow and your thoughts on what you intend to do with the free cash flow as you advance the model?

[Keith Siegner, executive]

Absolutely. So -- and 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 appropriately balance the reinvestment in the 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 has said and I have said, against those future sales drivers. Our goal is to 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, analyst]

Great. And then you've pretty consistently generated a lot of market share gains. Shawn, you talked in the past about your ability to consistently outperform the market at 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, executive]

Yes, that's a great question. It's hard for us to know for sure. But our observations on the category, and we try 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 that -- I think there's kind of -- in our world, there are 2 main buckets of competition. And remember, of course, we are operating at a certain price point, but this brand, Lovesac, stretches across -- I think, fairly broad demographics because we can sell to the very high-end customer who has 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 pulled them up to our price point through the real value that Sactionals create.And so we compete with all of the established brands in home that we've maybe be in the mall with or otherwise. We compete with brand-new startups to kind of copycat the Sactionals format, modularity, et cetera, and try 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 obviously our positive growth, 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 start-up land, capital is much more dear than it was over the last number of years. And so we -- they're not spending in necessarily the same ways across the board, just chasing growth. And I think the incumbents 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 -- within the category that is, 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 observe Lovesac's strategy of building a brand in between, leveraging pop culture, being in the zeitgeist through celebrity influencer, of course, our very sticky brand name, all of these things give us strength where I think many of our competitors can't mimic that aspect of what we do and how we do things. And I think the sac is a major player in establishing that brand.So for all these reasons, I think that we certainly are taking market share. It's hard for us to pin down exactly where and who it's coming from. And I think that does change based on the state of the category, which also has been in flux recently.

[Thomas Forte, analyst]

Great.

[Shawn Nelson, executive]

Great to hear from you.

[Operator]

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

[Shawn Nelson, executive]

Yes. Thank you so much for joining the Lovesac 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 #LovesacFamily for 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.