The Lovesac Company's Q3 2026 Earnings Call: Contradictions Emerge on Product Launches, Margins, Brand Strategy, and Strategic Focus

Date of Call: November 2025

Financials Results

• Revenue: $150.2M, up 0.2% YOY, $1M below guidance range
• EPS: negative $0.72 per common share, compared to negative $0.32 in prior year period
• Gross Margin: 56.1%, down 240 basis points YOY
• Operating Margin: Operating loss of $15.8M, compared to $7.7M loss prior year

Guidance:

• Full-year net sales estimated at $685M to $705M.
• Full-year adjusted EBITDA expected between $37M and $43M.
• Full-year diluted EPS range of $0.15 to $0.49.
• Q4 net sales guidance of $236M to $256M, representing low single-digit growth at the midpoint.
• Q4 adjusted EBITDA expected between $51M and $56M.
• Q4 diluted EPS range of $1.88 to $2.22.
• Gross margin projected at 56% to 57% for full year and 57.5% to 58.5% for Q4.
• Slowing net showroom expansion to ~10 openings in fiscal 2027.

Business Commentary:

• Revenue and Sales Performance:
• The company reported net sales of $150.2 million for Q3, slightly below guidance, but still managed a slight year-over-year growth in net sales.

• The shortfall was due to consumer uncertainty and choppiness in transactions, particularly in lower dollar volume segments.

• Gross Margin Pressure:

• Gross margin decreased by 240 basis points to 56.1% due to increased tariffs and transportation costs.

• This was partially offset by price increases, cost savings, and vendor concessions.

• Product Launches and Innovations:

• The Snugg platform became an important part of the sales mix, with a successful national advertising campaign.

• New product extensions like the PillowSac Chair Jr. and a fourth arm option for Sactionals were introduced to enhance product offerings.

• Marketing Strategy Evolution:

• There was a shift in marketing focus towards more personalized messaging and digital channels to better meet consumer needs.

• This strategy included increased use of paid influencers and programmatic digital channels to attract customers close to purchasing.

• Supply Chain and Domestic Manufacturing:

• Plans to manufacture Sactional insert pieces domestically by summer aim to neutralize or improve gross margins.
• This initiative is part of a broader strategy to reduce dependency on international supply chains and improve efficiency.

Sentiment Analysis:

Overall Tone: Neutral

• Management acknowledged 'challenging' macro conditions and a revenue shortfall, but highlighted 'slight year-over-year growth', 'market share gains', and 'encouraging green shoots' from strategic adjustments. The tone balanced caution with optimism about product innovation and execution.

Q&A:

• Question from Thomas Forte (Maxim Group): On the Loved by Lovesac recommerce, can you talk about what is the discount to the consumer? So how much are they able to save versus buying the product brand new? And then what's the gross margin to Lovesac on the recommerce sale?
  Response: Offers are positioned at 20-25% discount with two product condition grades. The program is expanding, building infrastructure to support a future trade-in program.

• Question from Michael Baker (D.A. Davidson): Can you help us with some of the P&L impacts we should expect next year in terms of sales, costs, margins, etc., with more domestic manufacturing?
  Response: No detailed FY27 guidance provided; focusing on harvesting the core brand for more profitable growth and preparing for a major new room launch in early calendar 2027.

• Question from Michael Baker (D.A. Davidson): Why the lower fourth quarter outlook today than what was implied in your guidance that you gave 3 months ago, if the industry seems to be getting better?
  Response: High-end segment performance is worse than broader industry (down 11% in Nov), plus tough comps over New Year's and an abundance of caution drove the more conservative outlook.

• Question from Eric Des Lauriers (Craig-Hallum Capital Group): Can you provide a bit more color on where the revenue weakness in the quarter is coming from?
  Response: Weakness was concentrated in transactions below $6,000, primarily impacting small Sactional setups. Adjusted promotions and marketing helped improve this in Q4.

• Question from Eric Des Lauriers (Craig-Hallum Capital Group): When you look at the marketing overhaul here, could you just give us a sense of how long you sort of expect this to take?
  Response: Immediate impacts are being seen from shifts to digital/influencer marketing. Broader brand storytelling evolution will continue into Q1/Q2 next year.

• Question from Matt Koranda (ROTH Capital Partners): Just wanted to make sure I understood the cadence of demand during the quarter and then into the fourth quarter here.
  Response: Q3 demand weakened after Labor Day, pressured by price increases on lower-tier transactions. Q4 comps are positive, driven by promotional and media strategy adjustments.

• Question from Matt Koranda (ROTH Capital Partners): On the gross margin outlook, I guess what's driving the softer outlook in the fourth quarter that's implied here?
  Response: Incremental promotional activity to drive sub-$6k transactions and some fixed cost deleverage due to lower sales volume are pressuring Q4 gross margins.

• Question from Brian Nagel (Oppenheimer & Co.): What would be the longer-term benefits to the Lovesac model with bringing manufacturing back to the U.S.?
  Response: Long-term benefits include potentially neutral or favorable gross margins, reduced inventory and shipping costs, more stable pricing, improved product, and new intellectual property.

• Question from Thomas Forte (Maxim Group): Can you talk about your gross margin strategy on entering new rooms?
  Response: Goal is to maintain high-50s gross margin percentages for new rooms, consistent with historical targets, supported by domestic manufacturing efficiencies.

Contradiction Point 1

Timing and Nature of the New Product Room Launch

A critical shift in the timeline and characterization of a major strategic initiative (a new "room" product launch) has occurred, moving from a future event to a more aggressive channel push within the same fiscal year. This directly impacts growth expectations for FY2027.

What is the consumer discount and gross margin on recommerce sales for the Loved by Lovesac program? - Thomas Forte (Maxim Group)

20251211-2026 Q3: This year has been about building the program's functionality; next year will see more aggressive leaning into this channel. - Mary Fox(President) and Keith Siegner(CFO)

Will the new room you teased be launched? - Michael Baker (D.A. Davidson)

2026Q2: The launch of a new product platform representing an entirely new room in the home is still a future event, not expected in early 2026. - Shawn Nelson(CEO)

Contradiction Point 2

Gross Margin Strategy and Outlook for Fiscal 2027

There is a contradiction between asserting a clear path to restore high-50s margins (a key financial target) and simultaneously citing significant headwinds requiring a strategic shift. This calls into question the confidence and timeline for achieving a core financial metric.

What's driving the softer gross margin outlook for Q4? - Matt Koranda (ROTH Capital Partners)

20251211-2026 Q3: The company has identified five key levers to restore gross margins to the high 50s, near 60% level over time. - Keith Siegner(CFO)

Is that long-term outlook still the idea? - Michael Baker (D.A. Davidson)

20251211-2026 Q3: The primary driver is the incremental need for promotions... This, combined with some deleverage on fixed costs... explains the difference from prior expectations. - Keith Siegner(CFO)

Contradiction Point 3

Scope and Expectations of the Marketing/Brand Refresh

A direct contradiction exists regarding the completion status and future spending of a major brand initiative. This affects expectations for future marketing expenses and the ongoing financial impact of past investments.

How long before the marketing overhaul's full impacts are seen? What are the timelines for ultimate success? - Eric Des Lauriers (Craig-Hallum Capital Group)

20251211-2026 Q3: Immediate impacts are already being seen in Q4... The longer-term storytelling and brand refresh will continue to build in Q1 and Q2 next year. - Mary Fox(President) and Shawn Nelson(CEO)

Can you provide more details on the timing of the brand refresh and the overall strategy? - Eric Des Lauriers (Craig-Hallum)

2026Q2: The brand refresh is essentially complete and has been absorbed as an investment over the past few years. There is no meaningful increase in marketing expense planned... - Shawn Nelson(CEO)

Contradiction Point 4

Gross Margin Outlook for the Fourth Quarter (Q4) of FY2025

The explanation for a key quarterly financial metric (Q4 gross margin) has shifted from being driven by a specific, lapped headwind (prior promotions) to being pressured by new, incremental actions. This changes the narrative around operational execution and forward margin trends.

What is driving the softer gross margin outlook for Q4? - Matt Koranda (ROTH Capital Partners)

20251211-2026 Q3: The primary driver is the incremental need for promotions to remain competitive... - Keith Siegner(CFO)

Can you help me understand that a bit more? - Matt Koranda (ROTH Capital Partners)

2026Q2: The primary driver for the Q4 gross margin improvement year-over-year is lapping the heavy promotional activity that began mid-Q4 last year. This is a significant headwind in Q3. - Keith Siegner(CFO)

Contradiction Point 5

Strategic Focus and Growth Leverage

The company's stated strategic priority for growth has shifted between pursuing it through new product launches and marketing versus a more cautious, profit-focused "brand harvesting" approach. This indicates a potential realignment of strategic capital allocation.

Given planned fiscal 2027 changes including new room launch delays, reduced showrooms, and new sofa launch, can you outline expected P&L impacts for next year, including sales, costs, and domestic manufacturing margins? - Michael Baker (D.A. Davidson)

20251211-2026 Q3: The strategic principle is that focusing on 'harvesting the brand'... is more prudent in a macro uncertainty. This approach aims to build more profitability and cash strength ahead of a major new room launch... - Keith Siegner(CFO) & Shawn Nelson(CEO)

What portion of FY26 growth guidance (3%-10%) is attributed to product launches vs. market share gains? How has the recliner performed relative to expectations? - William Dawson (Oppenheimer, on for Brian Nagel)

2025Q4: The plan for FY26 is built on the assumption of continued category declines. Growth is expected to come from multiple sources: new product launches, new showroom expansion, and marketing enhancements. - Keith Siegner(CFO)