The Lovesac Company (LOVE) Q3 2021 Earnings Call Transcript

The Lovesac Company (LOVE -1.96%)
Q3 2021 Earnings Call
Dec 09, 2020, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Lovesac third-quarter 2021 earnings call. [Operator instructions] I'd now like to turn the conference over to your host, Ms. Rachel Schacter of ICR. Thank you.

You may begin.

Rachel Schacter -- ICR

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 filings with the SEC which includes today's press release. You should not rely on our forward-looking statements as projections 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 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'd like to turn the call over to Shawn Nelson, chief executive officer of the Lovesac Company.

Shawn Nelson -- Chief Executive Officer

Good morning, everyone and thank you for joining us today. I will begin my remarks by discussing the overall highlights of our third-quarter performance. Then Jack will discuss the operational highlights of the quarter and progress being made on our key initiatives against what continues to be a dynamic backdrop. Donna will then review our financial results and a few other items related to our outlook.

During the quarter, we continued to successfully navigate amid the challenging backdrop as demonstrated by our financial performance as well as our progress on the operational front. Strong top-line growth of 43.5% exceeded our expectations and is a testament to the exceptional job our team has done to meet customer demand amid a pandemic impacted environment. I continue to be very proud and grateful for their efforts. We saw extremely high levels of profit flow-through on this sales increase given our swift moves to cut costs and overhead and tightly managed inventory during the pandemic.

Of course, as sales have returned, so also will cost, as Donna will discuss in more detail. Now let me speak to some highlights on our operations. We are pleased with our showroom performance despite the pandemic environment as we operated churns in a variety of formats including walk-in, appointment only and virtual. The strength of our showroom performance is reflected in Q3's 25.5% comparable showroom sales increase.

All seven of our shop-in shops with Macy's and Best Buy were open during the quarter which Jack will discuss in more detail. The big news related prior to quarter end is that we launched a robust product offering on bestbuy.com, just in time for the holiday. We're very excited about this expanded partnership which will allow us to reach a broader audience and accelerate adoption of the Sactionals platform. We continue to be excited about the alignment of the Best Buy customer demographic with our own, especially in terms of their intent to buy within the home category when shopping at Best Buy, often during a relocation or remodel.

As you're aware, there are widely recognized headwinds we are navigating in the supply chain landscape including a general shortage of ocean containers and equipment. But overall, we have been able to maintain excellent inventory positions and are currently delivering the majority of orders to consumers within a week to 10 days as expected. Moving to our financial highlights. We continue to see very strong demand for our products in Q3 resulting in $74.7 million in sales or a 43.5% sales increase including 125% e-commerce growth.

In addition, we had a revenue contribution from two Costco temporary online pop-ups which lasted about four weeks each, ending in September and October, that were not reflected in the expectations we shared with you on our Q2 call. We had a strong start to the quarter with positive momentum from our Labor Day campaign which performed very well with media ROIs above our expectations. From a profitability perspective, our results came in well ahead of our expectations due to higher-margin product mix and more effective price promotions combined with some timing shifts and expense deferrals, as Donna will discuss in just a moment. As a result, adjusted EBITDA was $6 million for the quarter, and we ended the quarter with a cash balance of $47.7 million, up over 70% from last year and a debt-free balance sheet.

While the environment remains uncertain, we continue to focus on improving our capabilities, our offering, our customer experience and really our entire go-to-market position as we seek to expand our market share of the heavily fragmented industry. The attributes of our brand and product that resonated with consumers pre-pandemic, namely the convenience of researching and transacting online and receiving the product via FedEx directly to their door were only magnified during the pandemic as increased time at home led to increased spend on the home. With the swift pivot to entirely digital when showrooms were closed followed by a return to our omnichannel model, we have garnered tremendous learnings. We have very current market research that helps us understand the settle differences between our millennial and post-millennial customers and how they are spending during the pandemic.

We are tweaking our messaging and marketing tactics to fit these learnings. We have also proven out numerous digital-first tactics, from one-on-one FaceTime product demos to mass viewership Facebook Live events and many others as well. We estimate to have made over two million digital Sactional demos over the past six months. Nearly all of these new tactics we have teased out during this time will persist even after the shopping landscape returns back to normal.

And we are very confident in our ability to maintain high-growth even post-pandemic. Perhaps most importantly, over the course of the pandemic, we have attracted many new customers to the Lovesac family. This growth in our customer file will yield benefits for years to come, and we will make sure we are using our sophisticated marketing approach to build engagement and drive attachment rates and lifetime value of these new customers. We also still have less than 2% unaided brand awareness with significant market share opportunities.

So we'll build on these new customer gains as we lean into marketing, supported by the very, very strong ROIs, as Jack will discuss. Despite the pandemic, we remained focused on the long-term potential of the company and making progress on the strategic initiatives we have in place to drive long-term growth and market share gains. We continue to make investments in support of our expected growth while remaining agile and disciplined. These include: making the investments in infrastructure, like our warehouse in California and our new East Coast warehouse opening in Q4, continuing to bring back expenses that had been temporarily halted or reduced, particularly on the marketing front to drive even more growth; innovating on the product front we continue to work and continue to target early next year for an exciting new product launch that will allow us to expand into a tangential category in the home, elevating the omnichannel customer experience.

As previously discussed, we rolled out our new e-commerce platform in mid-August, and we are seeing a very positive response to the improved user experience and functionality with new features, such as appointment scheduling for showrooms, faster load time of configurator pages, save configuration functionality, and additional customer experience improvement. We have experienced improved conversion driven both by mobile and desktop, in addition to an increase in attachment rate. On the sustainability ESG front, we believe that Lovesac leads the DTC and furniture categories in its commitment to sustainability and ESG initiatives, building sustainable products and contributing to a reduction of furniture waste and landfills. This is an endeavor that has been core to our DNA since the inception of our company, guided by our designed for life philosophy.

With substantial progress to date including sourcing all of our thick upholstery fabric from 100% recycled plastic and repurposing over 20 million plastic bottles in last year alone. Our products are built to last a lifetime and designed to evolve. And next year, we will be improving our communication on our tracking impact. Adherence to our high bar for innovation and sustainability will, we believe, fuel market share gains in the current and even new categories in which we will compete over time as we make operating decisions in support of our purpose which is to inspire human kind to actually buy less, but buy better.

As we enter the final quarter of the year, we feel good about our business fundamentals and positioning. We are pleased with our strong start to the fourth quarter, but are mindful about COVID uncertainty, especially with the high-volume shopping days that lie ahead and the possibility of holiday shopping shifting earlier in the season. So overall, we are pleased with our third-quarter results which exceeded our expectations from the top and bottom line. Against the pandemic impacted environment, we generated a positive adjusted EBITDA of $6 million which is the first time we've achieved profitability in the third quarter.

We have been very disciplined in operating the business by stringently controlling expenses, inventory, and working capital, some of which we recognize as temporary. As sales return, so also will cost including marketing overhead and headcount. As we begin the fourth quarter, we believe we are very well positioned to continue to drive demand as well as capitalize on the demand we have seen year-to-date for our unique products that are resonating with the consumer and we look forward to building on our success to date as we close out the fiscal year. Before turning the call over to Jack, I just want to thank all of our associates for their hard work and dedication to our customers during these difficult times.

And with that, I will turn the call over to Jack to provide you an operational update and discuss the progress being made on our key strategic priorities.

Jack Krause -- President and Chief Operating Officer

Thank you, Shawn and good morning, everyone. Our third-quarter top-line growth is a testament to our continued agility and ability to pivot the business to meet strong demand from new and existing customers, however and wherever they choose to shop at Lovesac. Our Q3 new customer metrics were reflective of the success we are building awareness of our brand and attracting new customers. Total customer count was up 34% versus Q3 of last year, and we had an almost 40% increase in Sactionals platform new customers, both of which bode well for us going forward.

Now, let me give you a quick update on our operations, both showrooms and with our channel partners. Currently, 100% of our showrooms are in the walk-in phase due to increased health and sanitation protocols that I will discuss later. We also operate under the assumption that this can change rapidly due to market conditions. On the channel partner front, our Best Buy shop-in shops are continuing to meet or exceed our expectations.

And subsequent to the end of the quarter, we have expanded our relationship with Best Buy to include selling Sactionals on bestbuy.com. Showcasing our product through established and innovative online retailers like Best Buy expands our brand awareness, serving as another touchpoint during the Sactional shopping journey. And through this expanded partnership, we'll be able to reach a broader audience and accelerate adoption of the Sactionals platform. We believe the Best Buy brand and their customer profile is a great fit with Lovesac and look forward to a successful and growing relationship together.

In addition, our four Macy's shop-in shops are open and continue to be productive. In terms of our Costco pop-up shops, while we had no physical pop-up shops discussed last quarter, we did pivot to test and then roll out two temporary online pop-ups which have lasted approximately four weeks, ending in September and October and generating $7.7 million in total volume. We also have a third show running now through December 6. Importantly, our partner channel, business development, overall grown profitability through the improved structure of these partnerships despite a sales decline of 8% due to the change in the Costco business.

We are continuing to work on a long-term agreement on the Costco business, and we'll provide a more detailed update on the Best Buy and Macy's partnerships, along with our Q4 results. Throughout Q3, we made good progress and important strides on our long-term strategic growth initiatives which I will now discuss. Shawn already covered product innovation. So I'll get straight into discussing our key initiatives, starting with the efficient and marketing and merchandising strategies.

We continue to drive more efficiencies and high returns from our marketing spend. Our core media spend this year generated 50% more incremental sales than the prior year, with media ROI increasing significantly compared to last year which is driven partially by an increase in showroom and touchpoint count. As we have said before, our showrooms serve as great amplifiers for our brand and the return of our marketing spend. Each one we open is worth approximately 1 point of increase in ROI.

In addition, we have been focused on using more tactics that drive reach and further penetrate our target customer via nonlinear buys like Hulu and over-the-top media, as well as targeting our linear buy to drive a higher reach. Through these tactics, we believe our reach grew from 65% to 80% in the third quarter of this year versus last year which helped drive our media ROI. Moving forward, we will continue to lean in to nonlinear media as part of our buy to drive reach as both have a role. New merchandising approach has enabled us to build higher-margin sales assumed in our results.

Our strong media and brand traction enables us to deploy less promotions as driving brand awareness tracks new customers to the business who are highly qualified and are resolved at conversion rates in both retail and online that are at some of the highest levels we have historically seen. Additionally, our merchandising strategies have helped to drive higher AOVs through product mix toward premium and higher-margin covers as well as higher attachment rates for new products, as Shawn mentioned. For example, our premium, Lovesoft and down saw a 10-percentage-point increase in their mix year over year in Q3. Showroom operations.

During the third quarter, we opened 10 showrooms in nine markets and ended the quarter with a total of 107 showroom locations. We also opened just last week our last showroom of the year in Hoboken, New Jersey. So year-to-date, we have opened 18 showrooms with one relocated showroom and opened in this fiscal year and classified as new which brings our total showroom openings for the year to 19. Within this environment, we continue to learn its tremendous amount and refine our approach to operational excellence.

We've implemented the increased health and sanitation protocols with evolved SR which is our -- what we call our COVID operating model, to include Plexiglass at the key customer interaction points, positioned showrooms to operate in a walk-in phase for all of Q4 pending market conditions. We've developed and implemented a showroom mission control role to assist customer at leaf line with on-spot appointment scheduling that we rolled out in November. This system which leverages the calendry platform, is similar to a restaurant reservation system and allows showroom employees to book private and one-on-one appointments, virtual or in person, with customers. We are currently implementing updates that allow customers to put appointments on their own seamlessly from our lovesac.com website.

Given the current environment, it is a feature that our customers have asked for and has already been well received. And as we move into the peak holiday weeks, we expect it to further resonate with customers who want one-on-one service. Other new showroom features include lease line block demos, fabric selection and swatch pickup. And we've also developed and implemented a proactive post-purchase specialist role, reaching out to web and showroom customers to drive post-purchase satisfaction including order confirmation, tracking communication and delivery follow-up.

In terms of showroom staffing, as previously mentioned, all showroom managers and assistant managers shifted from traditional showroom environment, Tier 1, into a virtual trade area environment, Tier 2, during the height of COVID-19, allowing them to sell virtually via podium web chat. Showroom managers also completed additional training to provide services such as Customer Love chat, email and phone as well as return processing. We subsequently improved CSAT of our Customer Love department by nearly 20 points and a significant reduction in wait times for refunds, demonstrating the impact of these improvements as we flex and adapt to this new environment. Three, in terms of expanding other channel presence and sales, I've already discussed the current status of our Best Buy and Macy's partnerships, we'll continue to pursue opportunities with other partners, and we will provide you with updates when there's news of note.

Finally, in terms of making disciplined investments in our infrastructure including technology and supply chain. First, e-commerce. Since launching our new e-commerce platform in mid-August, we have experienced improved conversion driven by both mobile and desktop. In addition, we have seen an increase in attachment rates which are now 40% versus pre-launch of about 34% of Sactionals purchases including accessories.

Accessories are now part of the purchase process as the customer builds their own setup. Continuous improvement and functionality have been added to the site since launch including faster load time, the configurator pages, appointment scheduling for showrooms, save configuration functionality and additional customer experience improvements. As mentioned earlier, our customer response to appointment scheduling has been very positive. And about 40% of our business is now appointment driven which is up from 0% pre-COVID.

On the supply chain side, we continue to focus on reducing costs, increasing efficiencies and mitigating supply risk in our supply chain. Our regional DC in California is fully operating at 150,000 square feet, and we are on track to open our East Coast warehouse at the end of this fiscal year. In addition, we are engaged in a multiphase project to launch a supply chain management system which will drive efficiencies in planning, production management, and order fulfillment functions, positively impacting our ability to execute with excellence. In supporting our goal to diversify our supplier base, we now have three production sources in three countries for Sactional inserts.

In summary, we continue to be pleased with how our teams have adjusted to the environment in ways that will benefit us in the long run. We continue to learn to effectively attract customers and are building the processes and infrastructure to deliver sustainable, brand accretive and profitable growth. As we look to the all-important holiday selling season, we are continuing to leverage our growing media spend as well as preparing our showroom operations for traffic throughout the holiday season by initiating our appointment system on the website as well as in showrooms. We're very pleased with our progress in developing a truly omnichannel brand where the channels are working together seamlessly to enhance the customer research and buying experience.

With that, I'll turn the call over to Donna to review our Q3 financials and a few details related to our 2021 outlook.

Donna Dellomo -- 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 a framework for how we are approaching the remainder of fiscal 2021. The 43.5% increase in net sales to $74.7 million was driven by triple-digit growth in our Internet channel of 125.2% and a strong rebound of our showroom channel of 27.9%.

This was partially offset by a decrease in other sales of 8.7% driven by a decrease in our Costco in-store pop-up shops partially offset by shop-in shops and the two temporary online pop-ups on costco.com that Jack discussed. These temporary online pop-ups drove Q3 sales higher than expected as we had assumed no Costco net sales contribution when we shared expectations for Q3 sales growth. Total comparable sales which includes Internet channel net sales and comparable showroom point of sales transactions, increased 53.5% in the quarter as a result of the 125.2% increase in Internet channel net sales and the 25.5% increase in comparable showroom sales. Please refer to our earnings press release for all other details on our comparable sales performance.

By product category, our Sactional sales increased 46.8%, our Sacs sales increased 30.6% and our other category sales which includes decorative pillows, blankets and other accessories, increased 6.2%. The 487-basis-point increase in gross margin versus the prior-year period reflects a 535-basis-point improvement in gross profit as a result of less promotional discounting, favorable product mix shift and lower product costs related to vendor negotiated tariff mitigation initiatives. These were partially offset by an increase of approximately 48 basis points in distribution and tariff-related expenses. We exceeded the third-quarter gross margin expectations we shared with you on our last call with the upside primarily driven by less promotional discounting and more favorable product mix than we had anticipated.

In addition, we realized benefits from vendor rebates in the third quarter that we had previously expected to come in Q4 and the expected step-up in freight and warehousing costs was lighter than planned due to a shift in timing of the projected inventory receipt. The modest 6% year-over-year increase in SG&A dollars reflects the impact of our COVID-related financial resilience measures. The year-over-year increase was driven largely by increases in employment costs, increased rents associated with our 107 showrooms, an increase in equity compensation relating to the modification of stock options, and credit card fees related to the increase in Internet and showroom sales. These increases were partially offset by a decrease in in-store pop-up shop fees related to the decrease in in-store pop-up shop sales and decreased overhead expenses as a result of COVID-19 related travel restrictions.

SG&A as a percentage of net sales decreased approximately 1,228 basis points resulting from the leverage of employment costs, selling related expenses, such as credit card fees and pop-up shop fees, rent, equity compensation and expenses related to COVID-19 restrictions such as travel. SG&A expense was approximately $5.1 million lower than our expectations, principally related to the continuation of our financial resilience measures that resulted in a deferral of professional fees and payroll-related to delayed hiring. Our investments in advertising and marketing which benefit extended periods, increased by $3.7 million or 75 basis points to 14.7% of net sales in Q3 due to increased media and direct-to-consumer program spend which contributed to the third-quarter sales increase. This increase was approximately $1.9 million lower than planned due to a shift into the fourth quarter to support the promotional activity as well as test and learn initiatives we have planned for the fourth quarter.

Depreciation and amortization increased $476,000 from the prior-year period to $1.9 million, principally related to capital investments for new and remodeled showrooms. In the third quarter of fiscal 2021, operating income was $2.5 million compared to an operating loss of $6.9 million in the third quarter of last year driven by the sales and gross margin increase as well as SG&A leverage I just discussed. Our net interest expense for the third quarter was approximately $47,000, principally relating to the unused line fees on our revolving line of credit. Tax expense in the third quarter of fiscals '21 and '20 was not material and relates to minimum state income tax liabilities.

Before we turn our attention to net income, net income per share and adjusted EBITDA, please refer to the terminology and reconciliation between each of our adjusted metrics in their most directly comparable GAAP measurements in our earnings release issued earlier today. Net income was $2.5 million or $0.16 in diluted earnings per share in the third quarter of fiscal 2021, compared to a net loss of $6.7 million or $0.46 diluted earnings per share in the third quarter of fiscal 2020. We generated positive adjusted EBITDA of $6 million as compared to an adjusted EBITDA loss of $3.7 million in the third quarter of last year. Turning to our balance sheet.

Our liquidity remains strong as we ended the third quarter with $47.7 million in cash and cash equivalents and $19.2 million in availability on a revolving line of credit with no outstanding debt on the revolver. In terms of outlook, given the continued uncertainty around COVID-19 related disruption, we are not providing formal net sales guidance. We are pleased with the start to fiscal Q4, but it's unclear how much of this represents an early start to the holiday season. In addition, COVID cases continue to increase, creating uncertainty, and we have very large volume holiday shopping days that still lie ahead.

Finally, we have three temporary online pop-ups with Costco planned for the fourth quarter versus the two executed in the third quarter. As a result, while we currently feel confident in our ability to generate healthy year-over-year net sales growth, we do not expect it to be at the level we reported in Q3. From a profitability perspective, we still expect expansion in adjusted EBITDA margin rate as gross margin leverage offsets planned operating expense deleverage. The tailwinds of less discounts and the benefit of cycling tariffs combined are expected to more than offset freight and supply chain cost pressures on the gross margin front, while shifts in spend will result in operating expense deleverage.

Therefore, for the fourth quarter, we expect a strong 50% to 60% year-over-year increase in adjusted EBITDA from the $8 million level reported in Q4 last year. We continue to expect to generate cash from working capital this fiscal year, and our expectations still reflect that capex will be in the $12 million to $14 million range. So in conclusion, we had a very strong Q3 from both a net sales and profitability perspective. And we look forward to closing out what has been an unprecedented fiscal year having made significant strides across all areas of the business.

We will build on this progress in fiscal 2022 and beyond as we position Lovesac for long-term growth, generating value for all of our stakeholders. With that, we would now like to turn the call back to the operator who can open it up for questions. Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Thomas Forte with D.A. Davidson. Please proceed with your question.

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

Great. Thank you. So Shawn, Jack and Donna, please stay well. I have one question and one follow-up.

So Shawn, at a high level, I wanted you to opine on to what extent COVID-19 has had a positive impact on the lifetime value of your customer and your customer acquisition cost? And to what extent that benefit is short term in nature and longer term in nature? And then I have a follow-up question.

Shawn Nelson -- Chief Executive Officer

Yeah. I'll give a quick comment and then allow Jack to fill in any blanks. It's a dynamic environment, right, to say the least. And I think that, in many cases, particularly in the home category obviously Lovesac and like companies have been recognized as perhaps COVID-19 beneficiaries with people working from home and spending money on their home.

So while I believe that much of our success of late has been due to the agility of the team and our ability to react in the environment, we certainly recognize these tailwinds. And in our case, rather than seeing just increased sales as many in the category have seen depleted inventories and longer lead times, there are so many things I've tried to purchase myself as a consumer that you just can't get right now or you have to wait much longer than expected. That's not been the case for us because of the way we've managed it. And so the results have come out for us more toward the bottom line, I believe, in the near term.

And essentially, I think we've gotten more for less, just obviously, smaller staffs on our front lines having reduced at the very beginning, buckling down for COVID. And also the way that we're spending on marketing, our ROIs are certainly high and increasing, partly due to the new tactics, but obviously aided by these sort of tailwinds. And so long term for us, our outlook, we would still like to maintain high growth, not just through new product innovation which will come, but also due to these -- the ongoing test and learn behavior that we've demonstrated for a long time, our commitment to innovation on the marketing front and larger spends as we get bigger, perhaps expecting the tailwinds to trail up. And so on the top line, we believe we can sustain high growth.

Obviously, the numbers get bigger and harder, but that's still our outlook on the bottom line. The company is leveraging and reaching that critical mass where I think we're able to show leverage. At the same time, we would expect some of that tailwind to trail off eventually and -- but time is on our side on that -- from that standpoint. And so I don't think that we're at all ignorant to the kinds of, we'll call it, COVID tailwinds that are driving some of our success at this moment.

But we haven't let it be a runaway train and just drive sales to the roof and complete our inventories. We've been very careful to manage that. I don't know, Jack, if you have anything to add to that?

Jack Krause -- President and Chief Operating Officer

I think you've covered a lot from the sort of managing the situation. The only thing in my observation is, Tom, from a market dynamics. If you're just looking at it from a consumer dynamics I think obviously, with massive disruption, we are advantaged to take advantage of that when you have brick-and-mortar disruption. So I think during the disruption of brick-and-mortar, we clearly became a preferred choice among people who didn't have as many choices as they did before.

And that's a tailwind that obviously won't last forever and obviously comes with its own costs. So I think then when you look at just the long run, that tailwind will go away obviously we all want it to. I think in the long run though that tailwind indicates an advantage for us as you look at some of the larger I think trends that are happening. I think the headquarters moving out of the metro area is less headquarters being a focus, I mean, people are moving out of metro areas, and I think focusing on homes, educating from home is becoming a new trend as well, as well as working from home.

And I think home buying obviously for the next couple of years, is probably going to be at an elevated level. Those, from a really long-term consumer trend, make us feel very good. And the way that people are beginning to purchase and the way our product is designed and our services design makes us feel really good about the long term. The short term, very unpredictable.

Shawn Nelson -- Chief Executive Officer

And the last thing I'll add, sorry, is I think that often, Lovesac is -- Lovesac's greatest opportunity and perhaps strength in the marketplace is our unique product. And what I mean by that is we're not just a merchandiser capitalizing on a macro tailwind. We have a product that still most people in the furniture shopping category don't know about and is, in our humble opinion, superior to its competitive products in many, many ways. And so the adoption of our platform which is a sticky platform which drives repeat which obviously has a very high customer satisfaction rating, is something that will grow, we believe, on itself.

As more people adopt the platform and reviews go up and word-of-mouth increases, so will the platform grow. And so this kind of tailwind for us is fantastic from that standpoint in helping to push us further down that path and increase the speed and weight of that flywheel. And so I think that that's one unique aspect of this company, is different than just a merchandise or capitalizing on a tailwind.

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

So excellent, Shawn. Excellent, Jack. So as my follow-up then, I've been very impressed with the way you've pivoted the use of your physical showrooms by appointment shopping to drive digital engagement. But collectively, would you say that, assuming that things returned to semi normal in the second half of calendar next year and you're able to return them all to physical open as they were in the past, is there a way to gauge the level of productivity at your showrooms and the potential for improvement if you're able to reopen them to the extent they were pre-pandemic?

Jack Krause -- President and Chief Operating Officer

Yeah. That's -- there are a lot of interesting things we're looking at. I would just say this, I think that while we know there were some really interesting performances and shifts between -- performances between the web in the showrooms as there were openings and closings, I would say the one thing we've learned is there's an immense amount of synergy between web and showrooms. And what's really taken place I think the biggest observation I would say is that versus a bifurcated shopping experience.

Now it's becoming integrated, where research is taking more place online. And in the showroom, it's a closing opportunity. And what that means for us is, I think a couple of things. I think it means huge opportunities for continued looking at how touchpoints operate relative to web and touchpoints all obviously include a number of options.

They include shop-in shops. They include potential concierge services. They include things like our showrooms. They include kiosks.

And they include other relationships. So what we're learning really right now is the go-to-market strategy has a lot more options than it would have a year ago and see it making us feel really good about the productivity we'll get out of our touchpoints in the future.

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

Great. Thank you, Jack.

Operator

Thank you. Our next question comes from the line of Camilo Lyon with BTIG. Please proceed with your question.

Camilo Lyon -- BTIG -- Analyst

Thank you. Good morning, everyone. Really remarkable quarter here. Congrats on that.

Actually, I think this is the first Q3 since being public that you reached profitability. So I want to touch on that first, specifically on the gross margin front. So if you could highlight, maybe Donna, if you could just touch on where are we in the tariff wind down efforts and how we should think about some of the incremental costs that we should expect to see from the temporary cost from the distribution center opening here in the fourth quarter? I'm really trying to understand and see -- because it seems like there's been a pull forward of the overall gross margin expansion relative to the time frame that had been laid out before. So any color on the progress there would be very helpful.

Donna Dellomo -- Chief Financial Officer

Yeah. Good morning. So yes, a couple of things. So probably the biggest impact on our gross margin expansion is the discounting, the promotional discounting, the reduction in promotional discounting with some product mix shift into some higher-margin items.

We are -- when you ask the question about how far are we through tariffs, from a dollar standpoint, we still have about 42% of our inventory purchases predominantly on the cover side coming out of China. So we are still being impacted, although less and less as we continue to go through the year. So you are seeing some year-over-year increase in gross margin because of the tariff shift. But more of it's coming out of the promotional discounting and some vendor pricing negotiations to help us mitigate the tariffs that are still coming out relative to the products coming in from China.

Hope that answers.

Camilo Lyon -- BTIG -- Analyst

Yeah.

Donna Dellomo -- Chief Financial Officer

So we still do a have tariff and we still will see tariff cycles through our -- impacting our gross margin, but we believe, at a lesser and lesser level, as the years go on. But we still do have some inventory coming in from China that is impacted by tariffs. And as far as the northeast warehouse, it's supposed to be fully operational by the end of the fourth quarter which means staffed inventory going in and so on and so forth. These start-up costs are a lot less than we originally had anticipated which is great.

So we don't anticipate a significant impact on our gross margin for the remainder of this year, even going into Q1 of next year relative to the start-up cost relative to the northeast warehouse.

Camilo Lyon -- BTIG -- Analyst

That's great to hear. That's great. Thank you for that color. Jack and Shawn, if I could just ask a question on how you think about coming back to the dramatic increase that you've had in your customers.

I think, Jack, you said there was a 34% increase in your customer file versus last year.

Jack Krause -- President and Chief Operating Officer

That's correct.

Camilo Lyon -- BTIG -- Analyst

I'm curious to know how you'd leverage that data to extend that lifetime value? So taking what you've seen this year from any sort of COVID related tailwinds, and making those really sticky into next year and beyond. What's the strategy in thinking around taking that rapid increase in customers that you've achieved?

Jack Krause -- President and Chief Operating Officer

Yeah. I think that's the beauty, and I think that's the excitement we have when we talk about the platform approach to marketing. So once people buy into the Sactionals platform, we continue to innovate and work on new products within that platform. And we talked a little bit about the tip of the iceberg, things like attachment rates going up from 30% to 40%, adding the storage seat, adding the electrical charging components, those things are starting to really obviously help us.

And obviously, there's a strong message in terms about the lifetime value of the product and flexibility and buying covers that also add. So in general, what we're seeing right now is while we've had accelerating new customer rates, we've seen attachment rates and repeat rates in terms of purchases maintained and be very strong. And I would expect, with some of the innovations that we have coming in the next year or so, that will only strengthen. So we're very excited about the opportunity to leverage the platform and the innovation on our current customers.

And we are seeing excellent trends right now. Shawn, I don't know if you want to add anything to that.

Shawn Nelson -- Chief Executive Officer

Yeah. I mean again for us, each customer is special. We -- our unique designed for life proposition would have them being customers for life. We're very interested in those relationships.

We're very interested in delivering to them new ways to delight them and allow them to reverse compatibly, add to their Sactionals and also eventually get into other categories in a designed for life way. And so there's nothing but good news. We take our customer list very seriously and view it as a major strategic strength of Lovesac.

Jack Krause -- President and Chief Operating Officer

Yeah. I mean the real business approach to it is we think there's more value in mining deep into the platform and adding innovation than there is and adding add-on categories in terms of accessories. So typically, that will be the approach, go deep into the platform, design things that are key to the platform. So you're staying in your core business and getting stronger in it.

Camilo Lyon -- BTIG -- Analyst

Just to follow up on that. I think it's fascinating that you've had this tremendous increase. Have you seen a deepening of your core consumer demographic or has there been a broadening of the demographic that's coming to the brand?

Jack Krause -- President and Chief Operating Officer

It's been pretty dynamic this year. I would say we'll probably be in a better position after the fourth quarter to talk more details. We have seen changes in the demographics, along with the disruption. We've certainly seen a younger group come in I think especially with the online surge we saw that is a different -- a slightly different demographic than the core, core.

But typically, what we're seeing across the board is strengthen the business across all of the demographics really.

Camilo Lyon -- BTIG -- Analyst

Got it. All the best guys. Great job. Thanks.

Shawn Nelson -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your question.

Brian Nagel -- Oppenheimer and Company -- Analyst

Hi, good morning. Thanks for taking my questions.

Jack Krause -- President and Chief Operating Officer

Brian, good morning.

Brian Nagel -- Oppenheimer and Company -- Analyst

First off, congratulations on a great quarter. Very nice.

Jack Krause -- President and Chief Operating Officer

Thanks.

Brian Nagel -- Oppenheimer and Company -- Analyst

So the first question I have, I think it's a bit of a follow-up to the prior question. But just with regard to promotional activity and the positive benefits we saw to gross margin here in Q3. And the question I have is, as you look at the reduced promotional activity, do you think that is a function of COVID in an extraordinarily strong underlying demand environment or is it starting to show that maybe there's greater overall awareness of the Lovesac and the products that could suggest maybe promotional activity could be more subdued going forward?

Jack Krause -- President and Chief Operating Officer

Boy, that's a hard one. So many different things are happening right now. I think we're certainly happy to have benefited right now from the stickiness of the brand and the situation and allowed us to reduce our promotions at a critical time obviously in the company. And to really turn and pivot into profitability is a significant win, I think.

In terms of long term, I think we're going to continue to look at the opportunity in terms of what are the things we do with our pricing and promotions to allow the strongest long-term growth of a sticky brand. So I think there's a lot we need to understand and analyze about our customers and the value proposition before we think we have a real insight into the sort of long-term effectiveness. But certainly in the short run, it helps us make our -- it makes our decisions a lot easier in terms of how to think about. Are we going to redeploy profitability into more marketing? Are we going to give it back to the customer? Are we going to do a number of things? We're in a really good situation that we can understand consumer trends, make the right decision in order to grow as a super sticky customer loved brand.

Shawn Nelson -- Chief Executive Officer

And I think it's important to -- I think the most important takeaway for now is that while we're pleased to have been a beneficiary of some of these COVID tailwinds as opposed to the opposite and we are simultaneously achieving more penetration of our brand, more acceptance and again, building that customer base that will support us going forward. And also just credibility in the marketplace which drives more sales, because Sactionals and new products like these are the kinds of things people are skeptical about until their neighbors have them or they get those kinds of reviews. All of those things bode well for us right now. But that said, where you're seeing it play through is not just in top-line growth for us, in fact, less so than some in the home category.

But again, in profitability, in margin, because we're able to get a little bit more for a little bit less and promote less and those sorts of things in this environment. And so I think that we are still pretty cautiously optimistic about continued gross margin recovery about the go-forward quarter. It's not to say that we're pessimistic, but we don't want to get over our skis. We don't want the outlook for this company to get ahead of itself because we recognize those benefits in the near-term coming through on that gross margin line, maybe a little bit prematurely coming through in our net margin, maybe a little bit prematurely.

And it's good because we'll build on it, but it's been increased, I think.

Jack Krause -- President and Chief Operating Officer

Yeah. And I think in the short run, as Donna mentioned, if you -- the pieces putting together, I think the increased margins and the ability to market with less discounts bodes well for investing then additionally in our ability to scale and become a company that's really strong in the next five years which is where all of our focus is right now.

Brian Nagel -- Oppenheimer and Company -- Analyst

Got it. That's really helpful. And then the follow-up question I have, look, we're hearing from you today and there a lot of companies just this -- and I think it's very, very smart. It's kind of caution toward the holiday, given the potential pull forward demand or shifting demand dynamics through this COVID-19 holiday.

So the question actually, as you look at your data, is there anything that you're seeing with sales here so far in Q4 that would suggest there actually has been a pull forward in demand or is it just more of an overall caution toward the season?

Jack Krause -- President and Chief Operating Officer

I'll take that and let either Shawn or Donna finish it off. I think right now, we certainly I think know -- we do understand and know the shopping patterns have stretched out the holiday season and pulled it forward a little bit. With that said, we are certainly very happy with where we are. We're comfortable with trends.

And I think we feel good about the business right now as we go through the first -- the fourth quarter.

Shawn Nelson -- Chief Executive Officer

Yeah. I don't think we -- from the data, I can see anything that would confirm or not confirm that things have been pulled forward. We are again pretty pleased with the results so far and remain cautiously optimistic. For us, fourth quarter is a big deal.

And we were very pleased obviously to see profitability in that third quarter which is the first time we've seen that happen. And we'd like these trends to continue and believe they can.

Brian Nagel -- Oppenheimer and Company -- Analyst

Thank you. Again, congratulations.

Shawn Nelson -- Chief Executive Officer

Thank you.

Jack Krause -- President and Chief Operating Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Matt Koranda with ROTH Capital Partners. Please proceed with your question.

Matt Koranda -- ROTH Capital Partners -- Analyst

Hey, guys. Thanks for taking the question. Just want to start off on the guidance and the 50% to 60% increase in EBITDA year over year. Any help on sort of the revenue growth that we're assuming to get to that level? Maybe you could just talk about revenue quarter to date, what percent of your plan is booked to date maybe? And what are you counting on for the rest of the quarter?

Donna Dellomo -- Chief Financial Officer

Yeah. We're not -- Matt, we're not specifically giving guidance other than we do expect the increased quarter over quarter in fourth quarter not to be as much as you saw our Q3 this year over last year. That's pretty much all the guidance that we're giving, along with the fact that we are indicating that we're -- we do have three Costco online pop-ups booked for this quarter. So we are anticipating some net sales and contribution coming in from Costco as well.

As far as the fourth quarter again our fourth quarter started off strong, but we remain cautiously optimistic as both Jack and Shawn have said. But as far as getting specific guidance as to what our net revenues or our net sales are going to be, other than it not increasing as much year over year as third quarter, that's the limited amount. And a lot has -- we have -- it's been -- what are we at, December 9? So we probably have a couple more weeks with the stronger shopping weeks happening. So at this point, a fair amount, probably more than 50% of our revenue is probably from our projections or end for the quarter.

Matt Koranda -- ROTH Capital Partners -- Analyst

OK. That's helpful. And then just on the Costco roadshow front. Can you just confirm there was no physical road show revenue in the third quarter? And then maybe just talk a little bit about the online roadshows and sort of your progress there.

It sounded like they were pretty productive, but maybe just a little more color on that.

Jack Krause -- President and Chief Operating Officer

Yeah, yeah. There were actually no road -- no physical road shows in the third quarter. I think there was some confusion because I think there were some online advertisements from Costco after they had been canceled, that made people think we had those. So we did have the digital road shows.

They did very well. Very pleased with them. We hadn't done it before and with little -- very little support, we're successful to the tune of I think the $7 million plus we discussed. We do plan on having road shows in the fourth quarter as well.

We will be testing three roadshows, and we're excited about it. In terms of long term, so everything is tied to the overall discussion. So we're still working with them I think from last report from our last discussion. In Q2, we were very sort of cautiously negative.

I would say we're now cautiously optimistic that we'll get to a good place for next year, and we'll inform you of any details as soon as we can wrap things up with them.

Matt Koranda -- ROTH Capital Partners -- Analyst

That's great. And then just if I could sneak one more in on the gross margin front. Donna, could you just quantify the vendor rebate benefit in the quarter? And I assume that doesn't repeat in the fourth quarter, but just clarify that for us.

Donna Dellomo -- Chief Financial Officer

Yeah. So it was -- I mean, in dollars, it was probably about $950,000. We do have a small amount still projected to come in, in Q4, but not to the magnitude of Q3. And that's comparative to probably about $1.2 million that was in Q3 of last year and then the rebates -- with no vendor rebates coming in the fourth quarter of last year.

Matt Koranda -- ROTH Capital Partners -- Analyst

OK, very helpful. Great job guys. I'll turn back to the queue.

Shawn Nelson -- Chief Executive Officer

Thank you.

Donna Dellomo -- Chief Financial Officer

Thank you.

Operator

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

Maria Ripps -- Canaccord Genuity -- Analyst

Good morning and thanks for the questions. It seems like you have a fairly successful shop-in shops strategy. Can you maybe talk about how you approach of working with channel partners evolved over the past several months? And what that might mean for growth and margin prospects?

Jack Krause -- President and Chief Operating Officer

Yeah, it's -- that's an interesting question. And I would say we're very pleased with -- as you do some of the background, if I back up a little bit and we talk about some of the Costco history. At the time, the profitability of Costco was not at the levels that we were seeing with some of the shop-in shop opportunities. And I think it really made us aware that we can operate with partners in a brand accretive way, in a very profitable way that's win-win.

I mean, what we offer is obviously a really unique product with a lot of stickiness and an ability to drive sales. And I think, in a very productive way, more productive than basically anybody else can do. And obviously, by partnering with the right partner, we massively change our capex expense and investment and obviously, a reduced way while maintaining touchpoint presence. And what I would say is we're continuing to look at the touchpoint opportunities.

And I think that the considerations are the ability to reach people, the amount of capital we have to spend and our ability to drive traffic or our partners' ability to drive traffic relative to historical models. And so if you think about a shop-in shop with Costco, you have synergies between brand and ability to drive traffic that are pretty high relative to the capex cost when you would compare it to -- for perhaps a classical showroom in a mall environment. So those are the opportunities we're looking at. I think what you'll see is continued growth in showrooms.

We're committed to showrooms. But a continued increase in the mix of nontraditional showrooms in our touchpoint strategy. And a lot more to come as we develop the specifics. We're in a test and learn mode for the next six months in terms of touchpoints, so we'll be giving you updates as we make decisions.

Operator

Thank you. Our final question this morning comes from the line of Alex Fuhrman with Craig-Hallum Capital Group. Please proceed with your question.

Alex Fuhrman -- Craig-Hallum Capital -- Analyst

Great. Thanks very much for taking my question, and I'll have my congratulations on the profitable third quarter. I wanted to just ask about the showrooms, Jack. It sounds like you just kind of touched about it there at the end of the last question there, but you opened 10 showrooms in the third quarter.

I think that's -- if I can remember correctly, the most you've opened in any one quarter. Was that just maybe a little bit of pent-up demand from showrooms that you weren't able to open earlier in the pandemic or are you seeing some really good real estate opportunities out there? Is there anything you can share with us about the performance of your new stores and maybe what opportunities you're seeing on the real estate front would be helpful.

Jack Krause -- President and Chief Operating Officer

Yeah. Look, our showrooms, the 10 and I will attest to this as our team did an amazing job. But there was no intention originally to open all 10 in the third quarter. It's really based on the COVID impact and the impact of working with businesses and construction and approvals and everything else.

So that was really -- deals had already been committed to that were squeezed into the back end of the year. Now as we go forward, clearly, with any kind of disruption like this, it creates opportunities. So we see dramatic changes and opportunities in terms of real estate deal-making and values as well as options in terms of -- as we increase our ability to drive our own traffic. We inherently create significantly more options in terms of creating touchpoints that are less capital-intensive and perhaps have less expensive lease rates that we have.

So I think what you'll see is more diversity as we go forward with our touchpoint strategy.

Operator

[Operator signoff]

Duration: 75 minutes

Call participants:

Rachel Schacter -- ICR

Shawn Nelson -- Chief Executive Officer

Jack Krause -- President and Chief Operating Officer

Donna Dellomo -- Chief Financial Officer

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

Camilo Lyon -- BTIG -- Analyst

Brian Nagel -- Oppenheimer and Company -- Analyst

Matt Koranda -- ROTH Capital Partners -- Analyst

Maria Ripps -- Canaccord Genuity -- Analyst

Alex Fuhrman -- Craig-Hallum Capital -- Analyst

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