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LOVESAC CO (NASDAQ:LOVE)
Q3 2020 Earnings Call
Dec 12, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to Lovesac Third Quarter Fiscal 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions] Please note this conference is being recorded.

At this time, I'll turn the conference over to Rachel Schacter. Rachel, you may now begin.

Rachel Schacter -- Investor Relations

Thank you. Good morning, everyone. With me on the call is Shawn Nelson, Chief Executive Officer; Jack Krause, President and Chief Operating Officer; and Donna Dellomo, Chief Financial Officer.

Before we get started, I would like to remind you that some of the information discussed will include forward-looking statements regarding future events and our future financial performance. These include statements about our future expectations, financial projections and our plans and prospects. Actual results may differ materially from those set forth in such statements.

For a discussion of these risks and uncertainties, you should review the company's filing with the SEC, which includes today's press release. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today, and we undertake no obligation to update them, except as required by applicable law.

Our discussion today will include non-GAAP financial measures, including EBITDA and adjusted EBITDA. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP measures. A reconciliation of the most directly comparable GAAP financial measures to such non-GAAP financial 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 -- Chief Executive Officer

Thanks, Rachel. Good morning, everybody, and thanks for joining us today at Lovesac. I will begin today's call by discussing our third quarter results, after which I'll briefly review our high level thoughts around our outlook and provide a quick update on our recent new product introductions. Then Jack Krause, our President and COO, will outline the progress we are making toward our key growth initiatives, including results around our amplified marketing programs and shop-in-shop programs.

Finally, Donna Dellomo, our CFO, will review our financial results and a few key items related to our outlook in more detail. We are pleased with our third quarter results and some key learnings we've recently gained on the marketing front that give us great confidence on our ability to generate strong sales growth in the pivotal fourth quarter and beyond, which Jack will expand upon later.

Third quarter fiscal 2020 performance includes net sales growth of 25% and total comparable sales growth of 32.5%. This growth was driven by increases in new customers as well as increases in average order value or AOV. Our recent new product introductions, including the Sactionals Power Hub and Storage Seat have exhibited approximately 45% attachment rates to-date and have lifted the blended AOV of all Sactionals purchases, new and repeat, significantly.

We continue to make good progress on all strategic priorities, including supply chain optimization, sourcing, growth of the pop-up shop business and the successful launch of four permanent shop-in-shop locations within Macy's stores intended to be a test toward a larger program.

Our better-than-expected third quarter adjusted EBITDA results, in spite of experiencing slight top-line impact from a timing shift to some new showroom openings, demonstrates our disciplined approach to the management of this business, even while achieving continued high growth.

Some of our expected third quarter top-line growth was curtailed by strategic timing delays that have shifted a handful of new showroom openings from the third into the fourth quarter. We will finish the year with 90 total showrooms, which is a 20% increase over last year. And we are now past Black Friday in a few weeks into our critical fourth quarter, where we are already experiencing greater than 42% growth versus fourth quarter last year.

While we continue to expect a strong Q4, we are narrowing our full-year sales growth expectations to 40% to 42% versus the prior 40% to 45% in order to reflect our actual Q3 sales results. Importantly, we still expect to deliver a positive adjusted EBITDA for the full year, even after the pressures put on this business by the special China tariffs, which we have made rapid progress toward mitigating already, as outlined in our previous report.

Now, for more on Q3, our total comp increase of 32.5% for the quarter is comprised of a strong showroom comp increase of 27% and significant growth in our Internet business of over 48%. Adjusted EBITDA was a loss of $3.7 million for the third quarter, which was less than the loss that we had expected for this time period.

Operationally, we made good progress against our strategic priorities for the third quarter. A few highlights are, number one, we continue to test and learn on the marketing front. Number two, we made strategic investments in our infrastructure to improve the overall customer shopping and delivery experience just in time for holiday sales, which position us for continued success as we scale. Number three, we negotiated significant discounts with our remaining few vendors still producing in China and are already manufacturing the vast majority of Sactionals pieces, which by the way represent 57% of our overall sales in Vietnam and Malaysia.

Number four, we opened four new showrooms and completed no new remodels during the quarter as we continue to increase our physical presence. And number five, we enjoyed strong results from our pop-up shop business with Costco and successfully opened four permanent shop-in-shop locations inside of Macy's stores in LA, Atlanta, New York City and Long Island. These locations are operating now as a test that could lead to future expansion. We are pleased with the results even as we make adjustments to hone the operations of this new sales channel in real time.

Jack will discuss our third quarter operational progress and expand on the details of these alternative sales channels in just a moment. We are currently holding significant inventory levels of growth [Phonetic] that were purchased earlier in our buildup for this holiday season before the recently established vendor discounts have been negotiated. Because of this, the full effects of our sourcing work and strong discounts on China-made goods that are meant to offset tariff headwinds will not begin to positively impact our P&L until the end of Q1 next year.

We plan to have relocated all of our Sactionals production out of China before the end of next year and manufacture the majority of all other goods, including covers, outside of China by the end of Q4 next year as well. If special tariffs do not abate, we have a path to remove it all. These moves will effectively eliminate our exposure to the special tariffs and also result in lower first cost for these goods even versus their original cost levels, which you will see start to flow through our P&L with the turnover of the associated inventory throughout next year.

As predicted, we have already seen our overall gross margins decline by approximately 370 basis points year-to-date. We believe that we are through the worst of our gross margin degradation and can expect to slow but steady recovery of the gross margin line beginning in Q1 of next year. This expected recovery will be caused by previously purchased inventories cycling through the register, along with heavily discounted China-made inventory, along with goods manufactured in Vietnam and Malaysia actually being sold and flowing through our P&L as the majority of our cost of goods sold.

In terms of product innovation, we are excited by the launch of the new Sactionals Power Hub and Sactionals Storage Seat. Since the launch of both of these new products, just a few weeks ago, we have witnessed 45% of new Sactionals customers, including a Power Hub, Storage Seat or both in their transactions. The new customers that are purchasing these products demonstrate in AOV, average order value, that is $1,113 higher than those who do not. These two innovations so far are driving AOV higher by $150 across all Sactionals purchase, new and repeat.

Sactionals are not just a one-and-done product. Sactionals are a designed for life product platform that has meant to grow and evolve with your life, allowing consumers to add to it and upgrade it forever, even in ways they couldn't have imagined when they originally bought the product. Every Sactionals piece that we have ever sold over these many years already has a receiver hole for the Power Hub embedded in it, just waiting for its addition.

Storage Sactionals Seat can be integrated into existing Sactionals setups purchased many years ago, with no special considerations or alterations. We believe that over the long-term, this designed for life reverse compatible way of doing business will result in customer satisfaction and brand loyalty levels that will be unprecedented in the competitive landscape, not to mention the platform's unique implications in terms of real sustainability and reduced waste in landfills, which we are passionate about.

Numerous aspects surrounding each of these Lovesac inventions are of course patented or patent pending, and we continue to expand our vast intellectual property portfolio. We continue to focus on our long-term strategy and feel better than ever about our ability to aggressively gain market share in this giant and sleepy furniture category, even as we prepare to deliver step-wise innovation next year that will greatly expand our total available market opportunity and similarly disrupt yet another category.

In the current competitive landscape, it is important to understand how we are different from our industry, the competition and any kind of comparable, none of which are a very good proxy for what we're doing here. We are a true direct-to-consumer omni-channel product company that invents things and demonstrates them to our customers in a very personal way. We do not follow a merchandising model. Lovesac has zero low margin wholesale business, we are not an e-commerce company, a marketplace or a DTC pure-play chasing down rapid growth without regard to cash burn or profitability.

In fact, as we enter the fourth quarter and look forward to delivering another strong year of growth with positive adjusted EBITDA. If you were to add back the regrettably large figure that we have paid in tariffs by this year's end, we would have made significant progress on our original intention to grow adjusted EBITDA meaningfully this year. We view our rapidly expanding retail footprint as a key advantage over various disruptive high growth companies that one might compare us to. We are in 90 physical locations, ahead of most of them, and about to go even faster on that front.

Our tiny showrooms demonstrate some of the very highest productivity on a four-wall contribution basis of any retailer in any category that we're aware of, and it continues to improve in real time. While right now we are admittedly reinvesting much of our profits back into infrastructure to prepare for great scale, we are building toward an inflection point where we have sufficient systems, staffing and supply chain efficiency in place, our industry-leading gross margins can produce similarly attractive net margins someday. This is a plan that will require many quarters to unfold. But even if it does, we believe that we can continue to achieve this rapid growth even while making market improvements at the adjusted EBITDA line beginning next year regardless of its external conditions.

So, in summary, I am very pleased with our progress throughout this quarter. As we look to the pivotal fourth quarter of this year, we will continue to focus on executing against our strategic initiatives and leveraging our distinct competitive advantages to realize the significant growth potential that exists for this company.

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

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

Jack Krause -- President and Chief Operating Officer

Thank you, Shawn, and good morning, everyone. As you know, marketing is a critical pillar of our growth strategy, given that our brand is still in its infancy, and we are investing to increase brand awareness and drive sales. We continue to test and learn with our marketing, pushing the envelope, being innovative with campaigns, channels and cadence. As we mentioned on our last call, we had planned to moderate our marketing spend in Q3 and we had expected an associated sales deceleration.

For the quarter overall, we felt sales growth of 25% and our comp sales growth was strong at 32.5%. As a reminder, we are up against a difficult comparison last year with the launch of our very first Labor Day national media campaign. So, on a two-year basis, our Q3 comp growth accelerated from Q2 and was the strongest that has been year-to-date.

As we look ahead to Q4, we have incorporated marketing learnings in our marketing, beyond the traditional furniture buying events and are pleased with the results of the Q4 revenue growth of over 42% quarter-to-date, as John mentioned earlier. While we continue to be strategic in terms of timing of our marketing spend and concentrating it in periods where we maximize ROI, especially during the peak holiday periods, we will also aggressively expand our marketing efforts outside of these periods where we see more opportunity to drive brand awareness. We will continue to look at new efficient marketing strategies to drive the business and many of the marketing initiatives we have successfully tested so far this year will be leveraged heavily in the fourth quarter. And you'll see this in Q4 as we expand our awareness media outside of our historical patterns and heavy up digital during key periods in orders [Indecipherable] conversion. This approach will have a positive impact on our ability to grow as we move beyond the typical furniture buying periods.

On the digital side, we are continuing to leverage our digital expertise and technologies as we grow the business. During the third quarter, we launched our mobile app for desktop in October. Since launch, this page, which is designed to mimic the mobile app, Sactionals' build experience is in the top 10 highest visited pages on our Lovesac website.

Additionally, 70% of the total mobile app downloads occurred in Q3 with the vast majority taking place after the launch of the desktop app. We're also encouraged to see the sales from the mobile app continue to drive that very strong average order value at over $4,000. Importantly, we have seen very good synergy between our TV media and our digital conversion spends, and we lean into higher digital marketing levels on a very agile manner looking forward.

Our next strategic growth priority is continuing to make investments in our infrastructure, including technology. These investments are aimed at improving the overall customer shopping experience and will position us for continued success as we scale the business. Tom Lee, our Head of Supply Chain, and is focused on various priorities, including, one, building scalable processes to replace the manual processes with automated applications for areas such as order management, planning and replenishment, distribution and logistics management; two, improving system integration between supply chain and our carriers, our 3PL distribution centers; three, reducing the cost per mile with planned addition of two more distribution centers in fiscal '21 with one on the East Coast and the other on the West Coast; and four, continuing to transition China source product to Vietnam and Malaysia for covers and liners, which Shawn discussed earlier. We'll continue to keep you updated on the progress of each of these four priorities.

Next, expanding and improving our showroom presence. We opened four new showrooms in the quarter, ending the quarter with a total of 84 showrooms with 73 locations now in the current rebranded design. We remain on track to open 17 new showrooms, getting 15 for the year in fiscal 2020 with seven of those openings being planned in Q4 alone. As Shawn mentioned earlier, we did see some timing delays of showroom openings in Q3 but we look forward to completing our openings for the year in the coming weeks and benefiting from our expanded presence from both the sales and brand awareness perspective.

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

As we look to next year, showroom openings will continue to accelerate and our shop-in-shop partners will expand. To support this growth, we're excited to announce the appointment of Clary Groen as VP of Real Estate. Clary will lead the real estate strategy evolution, the selection process as we continue to grow our showroom pop-up shop-in-shop footprint and expand the Lovesac brand. Clary's previous experience in various retail real estate roles such as Foresite Retail Advisors, Bluemercury and francesca's, just to name a few, makes him a great addition to our team and we're looking forward to seeing the benefits from his expertise. The creation of this new position demonstrates our focus and commitment to making the necessary infrastructure and talent investments to support the significant growth that lies ahead for Lovesac.

Turning to our pop-up shops. In the third quarter of fiscal 2020, we operated 192 pop-up shops with Costco, up from 135 in the third quarter of last year, which drove a significant increase in our other channel sales to $8.2 million from $5.9 million. Pop-up shop productivity increased 7.5% in the quarter, has been a contributor to our growth in the past 24 months.

In October, we also ran an 18-day event on costco.com providing Lovesac with nationwide coverage that was very successful. We scheduled an additional online event that will take place before year end. We continue to value our strong and progressing relationship with Costco as our pop-up shops and online roadshows events allow us to capitalize on the customer acquisition opportunities in high traffic locations, including both the brick-and-mortar locations and their websites, which provide us the opportunity to showcase a limited offering of our products to customers who may not know our brand and our unique product attributes.

As we continue to leverage this model and establish additional reach for the Lovesac brand, we launched our Macy's shop-in-shop pilot at four locations during the quarter. These four shop-in-shops are permanent asset-light locations in key Macy's stores carrying the same digital technology of our showrooms and are staffed by Lovesac employees under the direct supervision of our sales operations teams.

While still early, we are very pleased with the initial results and positive customer response as new customers enjoy the live Sactionals demo that, as experience has taught us, leads us to increased adoption of the Sactionals platform. Preliminary data shows that at the Macy's locations, we are acquiring significant number of new customers. The plan remains to test these four initial locations for at least a full year prior to expansion, and we will continue to update you on the test details, performance and potential expansion plans as that information becomes available. In addition, we're continuing to explore shop-in-shop format with other retailers, given the positive results we have seen thus far and our expectations for margin rate and contribution to be similar to our freestanding showrooms as we go forward, but with less than a third of our CapEx investments.

So, in summary, we're very pleased with all the operational progress we've made in Q3. As we look to the final quarter of the year, by far our most important from a sales volume and profit generation perspective, we have a strong start and we feel great about our positioning and marketing plans heading into the peak volume weeks. We will remain focused on disciplined execution of our growth strategies to help drive market share gains and realize the significant opportunity we see in our brand.

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

Donna Dellomo -- Executive Vice President and Chief Financial Officer

Thank you, Jack. Good morning, everyone. I will begin my remarks with a review of our third quarter results and then provide some commentary around our thoughts for fiscal 2020. Net sales increased 25% to $52.1 million for $41.7 million in the prior year quarter. This sales growth was driven by strong showroom Internet pop-up shop performance as well as new shop-in-shop test locations.

We saw growth in transactions as well as ticket resulting from successful digital marketing strategies, which drew new customers to the brand while also driving repeat purchase behavior. An increase in the number of showrooms also helped fuel our Q3 sales performance. Total comparable sales, which includes showroom and Internet sales, increased 32.5%. Comparable showroom sales increased 27.1% and represents our 12th consecutive quarter of positive comp showroom sales increases. We opened four new showrooms, which is 9% year-over-year growth and ended the quarter with 84 showrooms. As Jack mentioned, we are on plan to open 17 showrooms for the year with seven showroom openings falling in the fourth quarter.

Looking at our results by channel for the third quarter, showroom sales increased 15.8% to $32.5 million, Internet sales increased 47.7% to $11.4 million, and our other channel sales, which includes our pop-up shops in Costco locations and shop-in-shops in four Macy's test locations, increased $2.3 million to $8.2 million for the quarter. By product category, our Sactionals sales increased 26.3%, our Sac sales increased 17.9% and our other category sales, which includes decorative pillows, blankets and other accessories, increased 25.7%.

Gross profit dollars increased 14.7% to $26.3 million in the third quarter. As expected, gross margin percentage decreased by 415 basis points to 50.4% from 54.9% reported in the same period last year. This year-over-year decline was primarily driven by the 25% tariff impact, partially offset by reduced cost of our Sactionals and Sac products, primarily related to cost savings from a change in the sourcing of our Lovesoft and down blend fills and an ongoing shift to manufacturing to Vietnam and other countries outside of China. As a reminder, it is the timing of our tariff mitigation efforts that is causing this temporary gross margin pressure. As Shawn said, we fully expect to completely mitigate the impact of tariffs through the work we are doing on the sourcing front as well as collaboration with our vendors by the end of fiscal 2021.

For the third quarter, total SG&A, excluding advertising and marketing expense, increased 26.7% to $25.5 million from $19.3 million in the third quarter of last year. Excluding approximately $174,000 of other non-recurring expenses related to financing fees associated with our primary and secondary offering, and Board and executive recruitment fees, total SG&A increased to $24.3 million. The increase in SG&A was driven largely by increases in infrastructure improvements, insurance costs and increased employment costs, partially offset by decreases in various selling-related expenses.

Our investments in advertising and marketing, which benefit extended periods, increased $2.1 million or 40.5% over the third quarter of prior year. As a percent of sales, advertising and marketing expenses increased approximately 150 basis points to 13.9% this quarter, largely due to an introduction of additional media involving Veterans Day.

Depreciation and amortization increased $300,000 from the prior year period to $1.4 million, principally related to capital investments for new and remodeled showrooms. In the third quarter of fiscal 2020, the operating loss was $6.9 million compared to an operating loss of $2.7 million in the third quarter of last year. In the third quarter of fiscal 2020, adjusted operating loss was $6.8 million, excluding approximately $76,000 of non-recurring expenses related to financing fees associated with our primary and secondary offering.

In the third quarter of fiscal 2019, adjusted operating loss was $2.2 million, excluding approximately $440,000 of non-recurring expenses related to financing initiatives are secondary and primary IPO-related fees. Our net interest income for the third quarter was $134,000, which reflects the impact of our IPO and other primary share financings.

Tax expense in the third quarter of fiscal 2020 and 2019 was not material and was related to minimum state income tax liabilities. Before we turn our attention to net income, net income per share and EBITDA, I would like to point out that my discussion of these metrics will focus on net income and net income per share adjusted for the IPO and other financing costs as well as 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 today.

Adjusted net loss was $6.7 million or $0.46 per share in the third quarter of fiscal 2020 compared to an adjusted net loss of $2 million or $0.15 per share in the third quarter of fiscal 2019. Adjusted EBITDA was a loss of $3.7 million as compared to a loss of $400,000 in the third quarter of last year.

Turning to our balance sheet, we ended the quarter with $27.9 million in cash and cash equivalents. Ending inventory increase to 104% year-over-year, driven by higher sales, increase in capitalized freight costs relating to tariffs as well as an increased investment in the weeks of supply of the inventory on hand to support sales growth across all channels to be agile enough to support the success of our advertising and marketing investments as well as an increase in capitalized freight and warehousing costs relative to the build in inventory and tariff charges.

Now, I would like to discuss a few items as it relates to our fiscal 2020 outlook. From a showroom perspective, for the full fiscal year 2020, we are on track to open 17 new showrooms this year with seven showroom openings planned for Q4, and we continue to expect to remodel eight showrooms. As a reminder, we are now referring to our Costco roadshows as pop-up shops and our Macy's pilot as shop-in-shops, given the nature of the shop setup. For fiscal 2020, we will operate a total of four Costco in line roadshows, three of which happened in the third quarter, in addition to our in-store pop up shops with Costco as well as four test shop-in-shop locations with Macy's, which were launched in the third quarter.

We expect to deliver strong levels of sales growth between 40% and 42% in fiscal 2020, which implies Q4 revenue growth at or above the high end of this annual range. As Shawn discussed, we have seen greater than 42% revenue growth in the fourth quarter to-date. Combined with our seven showroom openings in Q4 or 21% showroom growth, expected cadence and impact of our marketing investments and our expectations for our pop-up shop initiatives, we are well positioned for the fourth quarter. Given the significant tariff mitigation process we've made, we continue to expect to generate positive adjusted EBITDA for fiscal 2020.

We expect full year gross margins for fiscal 2020 to be approximately 370 basis points lower than fiscal 2019, principally related to the following. The first being expected tariff pressure, which is being partially offset this year by mitigation actions and SG&A initiatives. Investments into our distribution infrastructure to support future growth, a slight headwind due to the continued shift in product mix toward Sactionals as well as a slight impact from higher pop-up shop channel mix sales. These decreases are partially offset by product margin gains relating to changes in discounting of promotional strategies, reduced product costs related to vendor sourcing strategy and negotiated discounts with vendors in China to mitigate tariff pressures as well as an accelerated shift of sourcing outside of China.

In terms of SG&A, excluding advertising and marketing expense as previously mentioned, we continue to expect the most significant SG&A leverage to be generated in the fourth quarter, given the seasonality of our business. As a reminder, embedded in our SG&A outlook is all of the investments we are making in the business across people, process and infrastructure, and our Q4 net sales volumes enable us to produce the greatest amount of leverage on these investments over the prior year.

Finally, as it relates to capital expenditures, we now expect to incur approximately $10.5 million of CapEx in fiscal 2020 versus our prior guidance of approximately $11.5 million due to a timing shift of investments of the Sac manufacturing CapEx to fiscal 2021. The vast majority of our CapEx this year is being spent on the opening of 17 showrooms, remodel of approximately eight legacy stores, the opening of four Macy's shop-in-shop pilot locations and approximately $300,000 being invested into the Sac manufacturing facility this year.

The remaining spend is being allocated to technology in our showrooms, inventory management and logistics systems, e-commerce platform enhancements and for headquarters data and support systems. For all other details related to our results, please refer to our earnings press release.

With that, we would now like to turn the call back to the operator who can open it up for questions. Operator?

Questions and Answers:

Operator

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

Brian Nagel -- Oppenheimer & Company -- Analyst

Hi. Good morning.

Shawn Nelson -- Chief Executive Officer

Good morning.

Brian Nagel -- Oppenheimer & Company -- Analyst

Thank you for taking my questions. So, the first question I want to ask, this with regard to sales growth, and I know there's a lot of moving pieces here. But in the fiscal third quarter, as you discussed, the 25% sales growth, so that was down from something in the mid-40%s in the second quarter, and then so far in the fourth quarter, it's pop -- sales growth improved back to 40%. So, could you help me understand better the rank order of factors that sort of say created that benefit, if you will, in sales growth in the third quarter. Are you recognizing if the comparison got more difficult?

Jack Krause -- President and Chief Operating Officer

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

Brian Nagel -- Oppenheimer & Company -- Analyst

Okay. So now -- so is there a way to, Jack, I mean that will push hard the spec, if -- can you look at your math and say if you didn't have that shift in openings from Q3 to Q4, what Q3 sales growth would have looked like?

Jack Krause -- President and Chief Operating Officer

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

Donna Dellomo -- Executive Vice President and Chief Financial Officer

I can. But let me also note that we were originally predicting to be are growth in the third quarter to be a little less than it was in the second quarter due to the things that Jack mentioned and also the growth of the pop-up shop business year-over-year. If you go back to what we had said in the second quarter call -- on the second quarter call, we -- again, we had predicted to take a dip in the third quarter relative to that as well. We're anniversarying the media, the growth in our shop-in-shops or pop-up shops year-over-year because we had significant growth last fiscal for a little lower in the third quarter of this year. The sales, we're probably looking at that shift in sales for the new showrooms opening probably to be approximately $2 million, which -- because we weren't able to open originally as planned in the third quarter, it's probably about a $2 million impact on the top line.

Jack Krause -- President and Chief Operating Officer

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

Brian Nagel -- Oppenheimer & Company -- Analyst

Got it. That's helpful. And then, another question with regard to sales. So you talked about the -- with nice performance so far here in fiscal Q4, so as the calendar goes, I guess, about halfway through the quarter, but just can you remind us where given the lumpiness of the holidays in the fourth quarter, how much of the -- how much of Q4 business has probably been transacted so far?

Jack Krause -- President and Chief Operating Officer

Wow. On a week-to-week basis, that change is pretty quickly, Donna, I'm not sure, but if you can -- if you have that, it's probably, I'd say, we still have a good at least 50% of the quarter to go. Is that correct, Donna ?

Donna Dellomo -- Executive Vice President and Chief Financial Officer

Let me -- give me a second, I'm just going to check that.

Jack Krause -- President and Chief Operating Officer

Yeah. I mean, there is a -- I think, and one thing just to build on that, what you're looking at the number is, is coming out, I think it's really important to note that while we intentionally pull back on the Labor Day in marketing or media really, because we saw an opportunity to really be a little bit more distinct between our awareness media into conversion media, we think we're in a really nice place, especially with the wackiness around the Q4 and the shifts. So just to be on media full time, and then just aggressively go with conversion digital media at the sort of the classic furniture buying period. So it gives us a real opportunity to expand our awareness to basically and always on basis.

Donna Dellomo -- Executive Vice President and Chief Financial Officer

And just to confirm, yeah, we are right around 50% at this point of Q4 -- Q4's volume.

Brian Nagel -- Oppenheimer & Company -- Analyst

And I'll just ask one more, then I'll give to someone else. But with regard to -- and congratulations on your quickly shifting to supply chain, so I heard you say that, as far as the tariff impact, we probably just saw bottom -- the impact you said it better. The impact on gross margin. We just saw bottom. Is it still the assumption that as the supply chain initiatives take hold that Lovesac will essentially get back everything into the [Indecipherable] gross margin as a result of tariffs over the next several quarters or so.

Jack Krause -- President and Chief Operating Officer

I'll cover that, and then I'll hand it, I think, to Donna and Shawn. It's a large basis. We certainly -- we are at the lowest level, I'd say, of margin and we'll continue to leverage in our margin. But it's also important to note that everything we gain from margin improvements won't go back to building pure profitability in the short run, because we have about 18 months where we've laid out a lot of infrastructure commitments, building showrooms, building a better WMS, etc. So, while we will gain significantly at the margin level will leverage significantly in the next 18 months. We're not going to aim to push 100% of that into EBITDA, because we're really just trying to build the base for the company being a $1 billion company in the next couple of years.

Donna Dellomo -- Executive Vice President and Chief Financial Officer

Yeah. And I think -- Go ahead, Shawn.

Shawn Nelson -- Chief Executive Officer

You go ahead.

Donna Dellomo -- Executive Vice President and Chief Financial Officer

Okay. So, yeah, to Jack's point, that's definitely something to keep into consideration. And as far as tariffs, just as a reminder, we do maintain 12 to 14 weeks of supply of inventory. So, as we're shifting out of China into Vietnam, we still do have inventory that's been impacted by the tariffs that we'll be selling through. So we'll continue to see some impact at lesser and lesser and lesser impact as we sell through that inventory, and there still will be a part of our inventory specifically related to fabrics that we're working to move out of China, but there is still -- although the smaller part of our inventory, we will still have a piece throughout this year that has a tariff impact. So, we will still start -- we will still see some tariff impact, although significantly less than last year, but there will be initiatives next year related to supply chain and distribution that will impact the gross margin line. So we're not expected to recoup a 100% of the tariff impact, but we do -- we absolutely do expect to see our gross margin line start to accelerate next year and then the years going out.

Shawn Nelson -- Chief Executive Officer

Yeah. Just one last comment. I think, the short answer to your question, Brian is, yes, we will see gross margins recover fully as we view it, but not overnight and not even in the next four quarters fully. And it's not the tariff issue alone, it's our investments into supply chain that are happening and need to happen to really get this business as scalable as we'd like it to be because we foresee high growth for a very long time. And so, we are investing heavily in that, it will just be a long protracted recovery over -- I won't give you in number of quarters, but more than four quarters, but we will absolutely -- we believe we have a direct path to absolutely get it back to where we'd like it to be.

And gross margin.

Brian Nagel -- Oppenheimer & Company -- Analyst

Appreciate -- appreciate all the color. Best of luck for the balance of the year. Thank you.

Shawn Nelson -- Chief Executive Officer

Thank you.

Operator

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

Thomas Forte -- D.A. Davidson -- Analyst

Great, thanks. I had two questions. So, first, I want to talk about your ability to opportunistically get higher quality real estate locations for your new showrooms in today's retail environment, anecdotally in Fairfield County, I've seen some new excellent locations in both Greenwich and Westport.

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

Jack Krause -- President and Chief Operating Officer

Okay. So, all lines -- I'll just answer that in order. So, I think, Tom, from the perspective of real estate, you're absolutely right on. And I think one of the things that having a very balanced business approach in terms of being omni-channel being digital having showrooms allows us and having a fair amount of marketing behind us giving us new choices. So, you certainly have seen off-mall locations as well as lifestyle center locations pop up. We will continue to be significantly more diverse in the future as we -- as we look at our opportunities, and we look at the investment and media relative to the investments and various levels of real estate as really shifts between customer acquisition approaches. So, net-net, I think you'll see us more in off-mall in the long run as we've seen the ability to open street locations very quickly based on our media, and that gives us a lot of power in terms of negotiation. So, I think we'll see a considerable diversity in the future as well as an ability to leverage our real estate cost.

The second one -- the second question was about Macy's. Yeah. So, I think the one thing to think about Macy's, they certainly have a lot of problems, sort of like the end of the retail world and the retail apocalypse. Macy's certainly has their own challenges, but they are pretty large companies still and they have a very large percentage of the overall furniture market in the US. In fact, they're one of the largest furniture retailers, and they have a significant shared sort of customer base that share some of the values of ours, especially in some of their more premium locations. So, I think we have a huge opportunity to learn where the biggest opportunities are, how their real estate works with ours, and how to leverage each other in order to create a low CapEx win-win high brand awareness model, a lot of opportunities. It is a test. And as soon as we have more insights, we'll keep you posted. But there's a lot of people shopping at Macy's, and the company is going to be around for a while and then we're going to try to see if we can leverage off each other.

Thomas Forte -- D.A. Davidson -- Analyst

Thank you, Jack.

Operator

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

Maria Ripps -- Canaccord Genuity -- Analyst

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

Shawn Nelson -- Chief Executive Officer

Donna, you want to start that or?

Donna Dellomo -- Executive Vice President and Chief Financial Officer

Yeah. Can you just repeat that one more time? I'm sorry.

Maria Ripps -- Canaccord Genuity -- Analyst

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

Donna Dellomo -- Executive Vice President and Chief Financial Officer

We didn't give Q4 guidance. Our guidance is saying 40% to 42% for the year. Does that make it clear?

Jack Krause -- President and Chief Operating Officer

And Shawn mentioned -- did mention 42% quarter-to-date, which -- so I think...

Maria Ripps -- Canaccord Genuity -- Analyst

Yeah.

Jack Krause -- President and Chief Operating Officer

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

Donna Dellomo -- Executive Vice President and Chief Financial Officer

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

Jack Krause -- President and Chief Operating Officer

Yeah. And we have said to you that the fourth quarter stack comps will be the highest of the year.

Maria Ripps -- Canaccord Genuity -- Analyst

Got it. And then, maybe on your advertising efforts, as your brand awareness increases and are you seeing any changes in the type of buyers you attract into the platform, either from a sort of demographic standpoint or the stickiness with the platform, and also how you're thinking about sort of stronger brand awareness driving high repeat rate over time?

Jack Krause -- President and Chief Operating Officer

Good question. So, in terms of -- we are seeing -- and what I'll do is, say, we are seeing some things that some things change, and I'll probably confirm most of that answer to our Q4 results as we talked about sort of the overall year-over-year for customer acquisition and look at the customer, but we are seeing -- we're certainly seeing a broadening of customer appeal across larger sets of age groups. So, we do see, along with the young millennials, we're seeing, what we call, the silver foxes coming in and buying at significantly higher levels as well. So we're seeing really an expansion generalationally [Phonetic] in the interest. And I think that's clearly directed based on the TV awareness campaigns that we've used in the last year or so.

And then, to follow up, what was your next question?

Maria Ripps -- Canaccord Genuity -- Analyst

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

Jack Krause -- President and Chief Operating Officer

Okay. All right.

Maria Ripps -- Canaccord Genuity -- Analyst

So you answered it. Thank you so much.

Jack Krause -- President and Chief Operating Officer

Yeah. And the AOV, I think you asked, we're continuing that's a good point because I didn't want to -- we are continuing to see increased AOV, and we're very -- I think we're very positive on that, and it's not through promotion, I think it's really critical to say we're going to see growth through repeat purchases through our new products. We're already seeing a really nice attachment rate from -- driven by both new customers and also our embedded customer group in terms of the Storage Seat and the Power Hub, and they will continue to grow in terms of impact on the business in the outyears and we're very excited about what we're seeing in terms of the platform.

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

Shawn Nelson -- Chief Executive Officer

Yeah. And I'll add, Maria, because you had mentioned the notion of future business being driven by word of mouth and by the context that we shouldn't forget [Phonetic] is that Lovesac has less than 2% brand awareness. Sactionals are a very unique invention, the masquerades of the couch, but it's quite unique in the landscape. There is nothing like it. As Sactionals catch on some day, behind our forcing it through the funnel with advertising, as they become popular, business has a tremendous opportunity to enjoy a tailwind. It just comes from brand awareness that we don't have yet, and we often overlook mentioning that because it's impossible to plan, but it's undeniable that the competitors who we sell couches against, many of them have significant brand awareness that drive those business at very little advertising. And we will achieve that as further we expand this brand, and that's just don't -- it's impossible to plan out, but that's something we very much expect .

Jack Krause -- President and Chief Operating Officer

Yeah. And I think to build on that, I think it's funny. We are asked a lot of questions about increasing levels of marketing, etc, and how does that work in the long run. And I think one thing for everybody to keep in mind is, because we have a strong showroom business as well as a DTC business outside of showrooms, we're really in a fortunate position. So to put it in perspective, this year alone, even with the significant increases in TV advertising, our number one source of new customer acquisition is showrooms. So that tells us two things. We have a long runway to acquire customers just with showroom growth, and number two, every time we open a showroom, we get a 2% increase in our ROI on marketing.

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

Maria Ripps -- Canaccord Genuity -- Analyst

Great. Thank you so much.

Operator

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

Dave King -- Roth Capital. -- Analyst

Thanks. Good morning, everyone.

Shawn Nelson -- Chief Executive Officer

Hey, Dave.

Dave King -- Roth Capital. -- Analyst

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

Jack Krause -- President and Chief Operating Officer

I can tell you -- so -- a couple of things. If you look at our -- I'll give you our year-over-year marketing income the last three years. So, year-over-year ending last year, our marketing grew from $9 million to $18 million. So that was 100% year-over-year. This year, we're going from $18 million to $30 million. So it's approximately a 50% growth year-over-year. So, we have growth that's higher than our marketing spend growth. Right now, it's at a higher rate than our total top-line growth. However, as you can see for those numbers, the rate of increase is decreasing, and we expect to see that to continue to decrease. So we do see an endpoint where we get the efficiencies. So we will see an increase approximately, I'd say, it's going to be about 50% to 60% in marketing increase in the quarter over last year, and we'll see very strong growth

Dave King -- Roth Capital. -- Analyst

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

Jack Krause -- President and Chief Operating Officer

Yeah. So, I can't -- I don't want to give you the details of the numbers in terms of go forward, because now we're splitting a quarter, I can tell you, for year-to-date, we are roughly at -- will be about in the mid-teens and transactions increases and approximately 20% [Indecipherable].

Dave King -- Roth Capital. -- Analyst

Okay, that helps. And then, as a follow-up on the marketing -- on the marketing front, how are the ROIs and the efficiencies on the marketing these days? Are the TV additional performance you're liking -- what's working? Is there anything that isn't working? Just some color there, I think, would be helpful. Thank you.

Jack Krause -- President and Chief Operating Officer

Yeah. I think, right now, ROIs have been relatively stable. We're not seeing a decrease or necessarily an increase. I think there is sort of -- there's two sets of -- there is headwinds in pricing and competition in terms of cost, and there's tailwinds in terms of building out our showrooms. So we expect, as we go forward for the next 12 months, to be looking at pretty stable ROIs based on different combinations. And we expect, Dave, also I would say, we're roughly -- this year, we're roughly spending at 12% of marketing --12% of net sales, that will possibly go up just a little bit, but we'll talk about that in the future. But we don't see any dramatic changes in terms of the rates of marketing will not increase faster than the rate of sales in terms of the future as we go forward.

Dave King -- Roth Capital. -- Analyst

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

Jack Krause -- President and Chief Operating Officer

Yeah. We're very -- yes, we're very pleased. To put it in more detail, I think the subtlety there is that, I think if you look at the market right now, just about everybody is advertising around those big furniture periods, right. And they're mostly digitally advertising or the classic companies are promoting $1,000 off etc. Our awareness or branded advertising has no promotional mentioned in it, it's not promotional advertising at all. So what we're really talking about is the distinction between creating brand awareness, which we believe is absolutely critical in the long run, and creating a more efficient way to create brand awareness and separating that activity from the conversion activity that is really around those key furniture buying periods and driven by digital.

We will certainly continue to heavily invest our digital awareness periods, but we're finding is that by creating brand awareness where there's less promotional noise, we can get some pretty high ROIs year around and it's back. It makes us feel really good about next year because instead of focusing all of our media and our analysis on 14 to 18 weeks, we're looking at 52 weeks and looking at really being subtle about how we manage our brand building aspect of our business relative to our conversion or promotional aspect of the business. And so that's why it's hard to understand what we're saying in our excitement is. I think as we roll out for next year and we talked about our annual plans, it will be a lot clear but we're seeing -- an always-on opportunity in brand awareness, which allows us to really manage cost and manage around the competition in ways they can't because they're so promotionally dependent.

Dave King -- Roth Capital. -- Analyst

Okay. That's very helpful. Thanks for taking my questions and good luck for the rest of the year.

Jack Krause -- President and Chief Operating Officer

Thank you.

Operator

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

Alex Fuhrman -- Craig-Hallum -- Analyst

Great. Thanks very much for taking my question. Wanted to ask about the attach rate on the Power Hub and the Storage Seat that you're seeing. Those were certainly very impressive numbers. Can you give us a sense of when that really started to pick up and have you been marketing pretty aggressively to former customers to get them to come back in and get the Power Hub? I'm just curious, how long we should expect to see that lift in average order value?

Jack Krause -- President and Chief Operating Officer

Good question. I would expect, we have not really been spending. I would say, we haven't been doing an over-aggressive marketing program with those items. We certainly market to our installed customer base obviously via direct mail and catalogs, etc. So they'll be aware of it, but we don't see any reason for that attachment rate at this point to go down. Now it's very early, but based on what we're seeing, we expect to build that into the business model for the next year.

Alex Fuhrman -- Craig-Hallum -- Analyst

Okay. That's really helpful. Thanks. And then, if I could just ask a question on the mechanics of the Q3 numbers here, comparable showroom sales were up very nicely close to 30%, which was more than the increase in showroom revenue. Can you give us just kind of the summary on how comp store sales have been higher than showroom revenue for this quarter? Is it just the timing of when stores have entered the comp base or something like that?

Jack Krause -- President and Chief Operating Officer

Exactly, it's all comp base. It is absolutely 100% driven by timing of the comp base. If you were to -- and obviously we have, as we look at our new showroom opening run rates, they're as strong as they've ever been. So we're extremely excited about, especially our new -- some of our off-mall openings having extremely high run rates, so it's primarily a shift.

Alex Fuhrman -- Craig-Hallum -- Analyst

Okay. Thank you very much.

Operator

Thank you. We've reached the end of the question-and-answer session. And I'll now turn the call over to management for closing remarks.

Jack Krause -- President and Chief Operating Officer

Shawn, you want to take this one?

Shawn Nelson -- Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Rachel Schacter -- Investor Relations

Shawn Nelson -- Chief Executive Officer

Jack Krause -- President and Chief Operating Officer

Donna Dellomo -- Executive Vice President and Chief Financial Officer

Brian Nagel -- Oppenheimer & Company -- Analyst

Thomas Forte -- D.A. Davidson -- Analyst

Maria Ripps -- Canaccord Genuity -- Analyst

Dave King -- Roth Capital. -- Analyst

Alex Fuhrman -- Craig-Hallum -- Analyst

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