The Lovesac Company (LOVE) Q4 2021 Earnings Call Transcript

The Lovesac Company (LOVE 2.22%)
Q4 FY 2021 Earnings Call
Apr 14, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings and welcome to The Lovesac's fourth-quarter fiscal 2021 earnings call. [Operator instructions] A question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Rachel Schacter, with ICR.

Thank you. You may begin.

Rachel Schacter -- Investor Relation

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 discussion of these risks and uncertainties, you should review the company's filings with the SEC, which includes today's press release. You should not rely on our forward-looking statements as predictions of future events.

All forward-looking statements that we make on this call are based on assumptions and beliefs as of today and we undertake no obligation to update them except as required by applicable law. Our discussion today will include non-GAAP financial measures, including EBITDA and adjusted EBITDA. These non-GAAP 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 financing measure has been provided a 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

Thank you, Rachel. Good morning, everyone, and thank you for joining us today. I will start by reviewing the highlights of our fourth-quarter and fiscal 2021 financial and operational performance. Then Jack Krause, our president and COO, will outline our key growth initiatives for fiscal '22.

And finally, Donna Dellomo, our CFO, will review our financial results and a few other items related to our outlook in more detail. Before turning to our results, I want to start by thanking the entire Lovesac team for their tireless efforts in what was an unprecedented year. Despite the challenging backdrop, fiscal 2021 was a landmark year for Lovesac, in which we delivered record financial performance and seamlessly pivoted our business to an all-digital model in the face of pandemic-driven showroom closures. We could not have achieved this without the grit and determination of our team.

The COVID pandemic demonstrated even more clearly the strength of our people, our brand, business model, and operating platform. And just as vitally, you build durable and value-enhancing lessons learned, new tools, and new customer insights that we will leverage in our decision-making as we look ahead. During the height of the pandemic, we established a crisis management process and team to facilitate rapid decision-making in a systematic manner. Our COVID response was centered around three key pillars: one, team health and safety; two, business strength; and three, financial resilience.

To that end, as you recall, during March and April, we temporarily closed down all of our retail showrooms and began operating as web-only business. To preserve and prioritize cash and financial health and liquidity, we pulled back on expenses and working capital. We remained agile and drove very strong results as we focused on meeting our customers' needs. We achieved many operational milestones in fiscal 2021.

Key among these accomplishments were we leveraged the full strength of our omnichannel model with the quick expansion of our digital capabilities. We attracted many new customers to the Lovesac family, with growth in our customer base expected to yield benefits for years to come. We expanded our brand awareness and channel partnership to include Best Buy and bestbuy.com. We opened 19 showrooms this year despite the challenging backdrop.

We strengthened our financial position and ended the year with a cash balance of $78 million, $30 million above last year. Even with the pandemic backdrop and while growing sales by nearly 40% year on year, we increased our post-purchase customer satisfaction scores significantly, resulting in happier customers and reduced friction. We delivered a record number of product demos, mostly via Facebook Live and FaceTime message as most of our showrooms were closed for much of the year. We launched an entirely new website at lovesac.com on a new, more robust, future-proof platform that will allow us to scale, improve operational costs, and be more agile in the future.

We introduced seven new Quick Ship fabrics, diversifying our core product offering to cover more aesthetic preferences while spreading risk across redundant vendors in multiple geographies. We've made dozens of internal process improvements, from shipping the most commonly purchased Sac Covers inside of Sac Duffel to save costs and reduced dislocation at delivery to the customer to numerous supply chain processes aimed at reducing friction, reducing shrink, increasing accuracy, and driving operational efficiencies. Let me now review the highlights of our fourth-quarter performance. For the quarter, total sales were $129.7 million, up 40.7% versus the prior-year period, including 86.1 growth in e-commerce.

We delivered total comparable sales growth of 45% and continue to be very encouraged by the broad-based strength in demand for our products across both new and existing customers. Adjusted EBITDA increased over 200% to $25.9 million, the highest profitability we've achieved in our fourth quarter. This strong end to the year is reflective of continued strength in the demand environment, combined with our focus on improving our offering, customer experience, and go-to-market position as we seek to expand our share in this heavily fragmented industry. Fiscal-year 2021 was a meaningful turning point to profitability and positive cash flow on an annual basis for Lovesac.

Working our way through the pandemic and all the challenges and tailwinds for our industry drove us to be thoughtful about our strategy, intentional and swift implementing tactical adjustments, and austere in our management of expenses as we braced for the unknown. The combination of all these factors led to a year that was, perhaps, more profitable than we would have intended in our long-term plans beforehand. We are happy to make this decisive leap in profitability on a percent basis and we intend to continue to grow the business profitably. However, many investments in infrastructure and headcount were put off and will be made in fiscal-year 2022 to support our outlook for long-term growth and goals to take meaningful market share in this very large category.

Even with our significant growth, we estimate we still have only captured approximately 2% of the couch market today. On a blended two-year basis, which is a more appropriate way to view our performance given the highly unusual FY '21, a steady bottom-line growth trajectory will be apparent, illustrating our ability to deliver profitable growth even as we continue to invest meaningfully in our infrastructure ongoing. Donna will elaborate more on our outlook and expectations in her comments. While we expect the elevated level of topline growth we saw in fiscal 2021 to moderate then perhaps normalize in fiscal '22, accelerated process on each of our strategic priorities is key to delivering growth and market share gains.

Besides our much anticipated major product innovation, which I'll provide an update on in a moment, we continue to make ongoing new product introductions and improvements to both our Sac and Sactionals product platform. Each innovation is meant to increase these platforms' ability to attract, retain, and expand our customer base, driving up average order value, as well as repeat business. A more recent example of this approach was evident in February when we launched an all-new Guest Rest Kit that comes with unique mounting hardware for storage within the Sactional storage seat. Further evidence of our commitment to reverse compatibility and our commitment to holistic, Designed for Life platform, not just products.

The Guest Rest Kit includes a topper and a sheet set that is sized just right to quickly convert four adjacent Sactional seats into the coziest spot for overnight guests that is roughly the size of a queen bed. So far, the Guest Rest has exceeded our launch period internal sales expectations. Additionally, in FY '21, we launched nearly seven new Quick Ship fabrics, diversifying our core product offerings to cover more aesthetic preferences, in turn, driving margin expansion while decreasing risk across redundant vendors in multiple geographies. We have also just resourced and relaunched our popular polylinen fabric, now utilizing fiber that has spun from recycled plastic in alignment with our Designed for Life philosophy and commitment to sustainability.

The product pipeline also includes exciting third-party brand collaborations and co-brands to announce over the course of the next few quarters. Each is meant to drive business across the Sac and Sactionals platforms respectively. We continue to be excited about the development and consumer response gained through testing to our new major product innovation that is planned to launch this year. We fully expect this product to redefine expectations for our category, further strengthening our competitive advantage for products in the home while growing our total addressable market.

However, due to the global disruption in the supply chain of key components, there is risk to our launch timeline now. We are focused on launching when we are in a good inventory position to meet expected demand as we do expect this launch to be meaningful to future revenues. We may not be on track to launch in the first half of this year as previously stated, but we hope to announce at some point in this fiscal year and we'll provide more information once we have some certainty. On the ESG front, Lovesac's commitment to sustainability has been central to our stated purpose and strategy for a long time now, horrified to learn that bulky furniture makes up almost a third of inorganic waste in landfills.

Sactionals were launched back in 2006 as a sustainable solution that could also be transported and delivered more efficiently. Not to mention useful over a long period of time where so many other products these days frustrate consumers that they are made purposely obsolete or out of style after only a few years. Sactionals are currently the best example of our Designed for Life, or DFL, philosophy in action, and are presently driving most of our rapid growth year upon year. This DFL philosophy calls for products that are built to last a lifetime and designed to evolve with the user's life as it changes.

People like our products for this very practical reason and invest in them usually with a long-term point of view. It is a competitive advantage that has helped us establish a unique brand, a high margin business, and a successful culture here at Lovesac. Our long-standing commitment to this sustainability principle is apparent not only in the durability of our products but through our ongoing sourcing efforts as well. For instance, our somewhat recent transition to making 100% of our upholstery fabric from recycled plastic bottles has already made Lovesac the highest volume consumer brand recycling plastic bottle into home decor fabric in the United States.

Through these efforts, we've already repurposed more than 100 million bottles today, and our impact is compounding with our rapid growth. We are excited to announce that we will soon be able to share more details supporting the results of our work in this realm with the release of our first industry-standard sustainability report by Q4 of this year. With the collection and tracking of relevant data throughout our supply chain and operation, we will establish benchmarks, against which we plan to deliver ongoing improvements. Furthermore, as an innovator in the home category, Lovesac intends to become the pioneer advocate and leader of what will be the next phase, going beyond the much-celebrated DTC business model where we are already one of the recognized leaders in our space.

We call it the CTC business model, Circle to Consumer, and we believe it will not only become a key differentiator for our brand, it will be good for the world too. CTC is a circular business model of our conception. CTC adopts elements from the broader circular economy movement where the company builds and maintains long-term life span product as it simultaneously develops services and policies meant to build and maintain long-term lifetime relationships with its customers. This direct sales model combined with more direct operational programs and policies can drive deeper customer connection.

Under this CTC model, we plan to deliver a more high-quality sustainably manufactured product platform in multiple categories across the home space. We will also surround these products with numerous innovative services such as in-home consulting, setups, styling, customization, subscription and maintenance services, peer-to-peer trading, resale, refurbishing, and remanufacturing programs that we believe will strengthen Lovesac's relationship with customers, our brand equity, and support a circular industrial economy. We view this holistic virtuous cycle model as the only one capable of achieving true sustainability. While our ambitions are far-reaching, we are prepared to make progress slowly and invest prudently over a very long time so that we can continue to scale rapidly and profitably as we work toward this vision.

Leveraging design for life as our unique approach to product design and circle to the consumer as our operational philosophy. We intend to achieve a 100% circular and sustainable business model, reaching targets of zero waste and zero emissions by 2040. We believe that this unique approach to doing business coupled with these tangible goals can make love even more differentiated, efficient, competitive, and profitable. Thus, helping us achieve our stated mission of becoming the most beloved home brand in the world.

We will have much more to say regarding these goals and our CTC approach over the coming months and years. You will begin to see it reflected already in some of the new operational tactics we are pursuing even this year, some of which Jack will expound on today. So in summary, we are extremely pleased with our fourth-quarter and full-year results, achieving significant top and bottom-line growth including record fourth-quarter profitability. We believe these results reflect the appeal of our platform and our strong discipline in managing the business through a volatile period.

We are immensely proud of our team successfully navigated a challenging operating environment, pivoting to meet the changing needs of our customers and to capitalize on the elevated demand for this category while also simultaneously advancing our strategic initiatives and building a better more adaptable Lovesac. I commend each and every one of them and I am so grateful for their resiliency and relentless commitment to serving our customers. The progress we made in fiscal 2021 positioned us well to capitalize on the continued opportunities we see for our brand in fiscal '22, where our outlook for the home category balance for this year is strong. Giving macro tailwinds, we believe will benefit the category including strong home sales, nesting, and urbanization.

We feel well poised to increase market share, achieve continued strong sales growth, and do it profitably. I will now turn the call over to Jack to review our fourth-quarter and full-year operational progress as well as our plan for fiscal 2022.

Jack Krause -- President and Chief Operating Officer

Thank you, Shawn. Good morning, everyone. Our strong fourth-quarter results and our annual performance are a testament to the strength of our business model and the agility of our teams. Total Lovesac sales growth for the year grew 37% driven by the strength of our showroom and web channels, which had a 32% increase in transactions and an 11% increase in AOV year over year.

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 with increased health and sanitation protocol. On the channel partner front, our Best Buy shop-in-shops are continuing to perform well. As previously announced during the fourth quarter, we expanded our relationship with Best Buy to include selling Sactionals on bestbuy.com.

We opened our fourth Best Buy location in March and are planning a shop-in-shop expansion with Best Buy for the second half of this year and early next year with preliminary plans to open over 15 additional shop-in-shops. Our Costco business was down its plan due to the reduction of physical roadshows. However, strength in higher-margin programs helped drive improved gross margins for our other segment overall to 44.6% up 500 basis points versus a year ago. We ended our test with Macy's at year-end with the intent of focusing on the development of the shop-in-shop concept with Best Buy and other potential partners with the ability to scale efficiently.

Our fourth quarter with a strong end to the financial year 2021 with good operational progress made against our key priorities and we'll build on this progress in financial year '22. Let me give you an update on our progress in the key areas and plans for the coming year. Shawn already discussed product innovation so I'll start with our efficient marketing and merchandising strategies. We maintain customer lifetime value or CLV to customer acquisition cost, CAC, ratio of 4.7 x in financial year '21 even as our advertising and media spend increased by 44% to $41.9 million for the year, demonstrating the efficiency and scalability of our marketing and customer acquisition strategies and the high returns that continue to deliver.

Our fiscal 2021 customer cohort generated a record average first-year value of $2,044 per new customer. We believe this is an outcome of our focus on driving penetration of Sactionals. Total customer count was up 32.9% in fiscal 2021, and we had a strong 48% increase in Sectional's platform new customers, both of which bode well for us going forward. As we have said before, our showroom service is a great amplifier for our brand and the return on our marketing spend.

Building on this synergy, we plan to open another 20 plus showrooms in fiscal 2022 of which four have already opened in the month of February. Our strong medium brand traction as well as relatively benign competitive environment enabled us to deploy fewer promotions in financial year '21. In addition, our merchandising strategies have helped to drive higher AOVs to product mix shifts toward premium and higher-margin covers. Leveraging our learnings from the second half of fiscal '21, we expect to continue to drive more efficiencies and high returns from our marketing spend.

In the financial year 2022, we'll continue to be focused on using more tactics that drive reach and further penetrate our target customer via nonlinear buys like Hulu and OTT. And we continue to scale into these platforms while targeting our linear buy to drive a higher reach. We're also seeing opportunities to increase our digital spending as customers spend more time digitally researching their home furnishing purchases. Turning to our showroom operations.

During the fourth quarter, we opened one showroom in Hoboken, New Jersey, and ended the year with a total of 108 owned showroom locations. As we continue to evolve our real estate touchpoints, we are piloting several new initiatives this year including a mobile concierge, a mobile showroom to give us the ability to provide a demo to the customer in their own home. We also plan to test kiosks as well and additional off-mall pad sites. These touchpoints will augment our core showroom strategy and we'll update you on the rollout of these plans as we progressed through our pilots in the first half of the year.

We believe that this asset-light approach to creating touchpoints will enable us to operate cross-functional much closer to the customer, enhancing customer satisfaction as well as providing strong support for future design for life and circle the consumer initiatives that Shawn mentioned earlier. As part of our continued focus on increased safety and productivity, we saw continued success from our on-the-spot appointment scheduling in the fourth quarter that enabled us to better leverage the strength of our omnichannel model. We hosted over 11,000 appointments in Q4 up 27% from the previous quarter and saw strong sales conversion that increased sequentially, resulting in appointments accounting for 46.4% of the showroom business. During Q1 of this year, we plan to test an environment where customers in e-commerce only areas can achieve a virtual appointment with our showrooms, enabling us to get even closer to the customer wherever they're shopping from.

As part of our commitment to operational excellence and the post-purchase experience, we also piloted a showroom post-purchase specials program in the fourth quarter. This team is focused on proactively communicating with customers at key milestones throughout the customer's delivery experience. During this pilot, we exchanged over 34,000 messages with our delivery customers and saw a significant increase in post-purchase customer satisfaction with the customers who dealt with a post-purchase specialist. We continue to refine this program with a pilot in the first quarter of this year and we'll update you on our planned expansion of this program later in the year.

In terms of expanding other channel presence and sales, I already provided you with an update on our expansion plans with Best Buy, we continue to pursue opportunities with other partners and we will provide updates when there is news of note. Finally, we are making disciplined investments in our infrastructure including technology and supply chain. We are pleased with the results that we've seen from our new e-commerce platform. In addition to the increase in traffic versus last year, we saw an outsize increase in conversion rate in transactions.

As with any website, our goal is to make continuous improvements based on customer feedback and changes happening within the business. Lovesac.com is playing an important role in the customer journey as shoppers are spending more time on the website to gain a better understanding of the brand and our products before visiting a showroom. As just discussed, to make an appointment feature has been a particularly important software launch. Shopping behavior in post-pandemic has changed and our omnichannel integrations have set us up well to make disciplined investments in e-commerce technology in the coming fiscal year, specifically focusing on the product configurations and post-purchase aspects of the customer journey as customers are getting more comfortable with shopping online for premium-priced products.

In terms of the supply chain, we continue to focus on the customer experience from order to delivery, reducing costs, increasing efficiencies, and mitigating risk in our supply chain. In addition to our Chicago-D.C. hub, our distribution network continues to expand with up to 600,000 square feet of additional space in California and Pennsylvania, allowing us to leverage outbound transportation costs and more trade areas. Raw material shortages and port delays are currently challenging across the industry and our top priorities this year are to manage them and mitigate supply risk.

In addition, to point forward, our holiday inventory into the first half to avoid holiday congestion, we are evaluating additional options to accelerate our distribution network expansion. On the supply side, we continue to strengthen our manufacturing capability in Vietnam, Malaysia, Indonesia, China, and the United States. And finally, our new supply chain ERP system, which is expected to be implemented by the end of the year will allow us to scale our ability to manage stocks with better order management, supplier management, planning and replenishment, and end-to-end tracking capabilities. So in summary, we're very pleased with our financial and operational performance in fiscal 2021 and continue to be excited about the opportunities that lie ahead.

We're very proud that our overall customer satisfaction scores ended the year significantly higher than when we began fiscal '21. This is a true testament to our ability to be agile and meet customers' needs. Even in a year, we have our consumers constantly change their desired journey in shopping preferences. While gains were driven by a number of improvements, they are truly reflective of our unrelenting commitment to better meet our customer's needs particularly in the post-purchase part of their journey.

The dynamic environment of the past year slowed some of our planned investments in the business. What we're implementing again this year as we return to our plan for investing and building capabilities and infrastructure required to drive sustainable and scalable growth. As we look to fiscal 2022, we are mindful of the uncertainty presented by the ongoing pandemic, as well as an industrywide supply chain dynamics. However, we feel great about the things we can control: the longer-term trajectory of our business and potential of our brand.

We are pleased with our progress and more committed than ever to build Lovesac business to satisfy customer needs and our own vision of creating a more sustainable business model through Designed for Life and circle to consumer initiatives. With that, I'll turn the call over to Donna to review our fourth-quarter and full-year financials and a few details related to our fiscal 2022 outlook.

Donna Dellomo -- Chief Financial Officer

Thank you, Jack. Good morning, everyone. I will begin my remarks with a review of our fourth-quarter results and then provide a framework for how we are approaching fiscal 2022. The 40.7% increase in net sales to $129.7 million was driven by strong growth in our Internet channel of 86.1% and the continuation of the strong rebound of our showroom channel of 28.4%.

This was partially offset by a decrease in other sales of 18.7%. This decrease was primarily due to no Costco in-store pop-ups during the fourth quarter of this fiscal year as compared to 206 in the prior year's fourth quarter related to ongoing vendor negotiations. And this was partially offset by three temporary online pop-up on costco.com compared to two in the prior-year fourth quarter. Total comparable sales, which includes Internet channels' net sales and comparable showroom point-of-sales transactions, increased 45% in the quarter as the result of an 86.1% increase in the Internet channel net sales and 22.6% increase in comparable showroom sales.

Please refer to our earnings press release for all of the details on our comparable sales performance. By product category, our Sactional sales increased 48.8%. Our Sac sales increased 6%, and our other category sales, which includes decorative pillows, blankets, and other accessories, increased 18.1%. The 890-basis-point increase in gross margin over the prior-year period reflects 508 basis points improvements in gross profit as a result of a reduction in promotional discounts, reduced inventory reserve levels, and lower product costs related to higher vendor-negotiated tariff mitigation initiatives due to higher volume.

Distribution expenses, including warehousing, freight, and tariff-related expenses, also improved by 382 basis points over the prior year's quarter due to higher leverage on warehousing and freight costs, including tariffs. We exceeded the fourth-quarter gross margin expectations we shared with you on our last call, primarily driven by less promotional discounting. In addition, we also realized benefits from lower inventory reserve levels and additional vendor rebates driven by higher volumes, partially offset by slightly higher freight and warehousing costs due to shift in timing of inventory receipts from prior quarter. The 30% year-over-year increase in SG&A was driven largely by increases in employment costs, increased expenses related to infrastructure improvements, increased credit card fees due to higher internet and showroom sales, increased equity compensation, increased rent associated with higher showroom count, and increased insurance expenses related to the growth of the company.

These increases were partially offset by a decrease in in-store pop-up shop fees due to no in-store pop-up shops occurring in the fourth quarter, as well as a decrease in travel expenses as a result of COVID-19-related travel restrictions. SG&A expense as a percent of net sales decreased 230 basis points primarily due to a decrease in selling-related expenses related to in-store pop-up shop fees, which were partially offset by temporary online pop-up shop fees and expense leverage in rent associated with our 108 showrooms and travel expenses, partially offset by a deleverage in employment costs, equity-based compensation, insurance, and credit card fees related to the growth of the company. SG&A expense was lower than our expectations principally related to a delay in hiring to the level that was anticipated for the fourth quarter in both our headquarters and showroom locations. Our investments in advertising and marketing, which benefit extended periods, increased by $5.1 million or 60 basis points to 12% of net sales in the fourth quarter due to an increase in national media spend with a focus on holiday media, increase in direct-to-consumer programming, and the continuation of running 15-second spots in our television advertising mix.

Depreciation and amortization increased $70,000 from the prior-year period to $1.6 million, principally related to capital investments for new and remodeled showrooms. In the fourth quarter of fiscal 2021, operating income was $21.8 million compared to an operating income of $5.3 million in the fourth quarter of last year, driven by the net sales and gross margin increase, as well as SG&A leverage I just discussed. Our net interest expense for the fourth quarter was approximately $45,000, principally related to unused line fees on our revolving line of credit. Tax expense in the fourth quarters of fiscal 2021 and 2020 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 $21.7 million or $1.37 in diluted earnings per share in the fourth quarter of fiscal 2021 compared to net income of $5.4 million or $0.37 diluted earnings per share in the fourth quarter of fiscal 2020. We generated positive adjusted EBITDA of $25.9 million as compared to an adjusted EBITDA of $8 million in the fourth quarter of last year. Turning to our balance sheet.

Our liquidity remains strong as we ended the fourth quarter with $78.3 million in cash and cash equivalents and $15.9 million in availability on our revolving line of credit with no outstanding debt on the revolver. Please refer to our earnings press release for details on our full fiscal 2021 financial performance. Regarding our outlook, we are still operating in a pandemic environment with wider-range potential outcomes as it relates to fiscal 2022. Given this, we're not providing formal outlook for the full year, but we'll share a framework that will be helpful as you are updating your model.

We are targeting another year of strong sales growth with over 20 showroom openings and expect to restore expenses that were pulled back in fiscal 2021 due to the pandemic. We are also making infrastructure investments to support the substantial multi-year growth opportunity that lies ahead. In a scenario where sales growth is in the low to mid-20% range, we would expect gross margin rate to be in line with fiscal 2021 and adjusted EBITDA rate to be in the mid-single-digit range, with the year-on-year margin rate decline driven by expense and investment dynamics just discussed. For our fiscal first quarter, which ends in a little over two weeks, we expect sales growth of approximately 38%, slight gross margin rate improvement over the same quarter last year, and an adjusted EBITDA loss in line with the same quarter last year, which is being driven by strategic expense reinstatements and infrastructure investments that were put on hold in fiscal 2021 as part of our COVID-19 financial-resilience measures.

We expect to generate cash from working capital in fiscal 2022, and we expect capex to be in the $13 million to $16 million range. So in conclusion, we had a very strong fourth quarter from both a net sales and profitability perspective in an unprecedented fiscal year, having made significant strides across all areas of the business. We will continue to 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

Thank you. [Operator instructions] Our first question comes from the line of Brian Nagel with Oppenheimer & Co. Please proceed with your question.

Brian Nagel -- Oppenheimer & Co -- Analyst

Hi. Good morning. Thanks for taking my question or questions. So first off, congratulations on a great quarter, great year.

Nicely done.

Shawn Nelson -- Chief Executive Officer

Thank you.

Brian Nagel -- Oppenheimer & Co -- Analyst

So the first question, I just want to touch on gross margin -- in another -- here in Q4, another extraordinarily impressive performance. So, Donna, you gave some parameters for the outlook for Q1 and, therefore, for all the current fiscal year. Because the question I was -- as we look at the drivers in Q4 of that substantial gross margin increase and, particularly, what you called out in the press release, less promotions, I mean, how should we think about the sustainability of the various drivers?

Donna Dellomo -- Chief Financial Officer

Good morning, Brian. Yes, so the fourth quarter, just as a quick reminder, that's between third and fourth quarter are the other quarters that our volume rebates come in. Those are the quarters, principally the fourth quarter, where we reevaluate inventory reserves. So there were some larger-than-anticipated benefits from being able to, I'll say, rightsize inventory reserves, as well as the benefit of -- I guess benefit of getting additional vendor rebates.

But the things that we do see as sustainable going into the first quarter, second quarter, and to the rest of the year would be the decrease in our promotional discounting, which I'm sure Jack will talk a little bit more about; the higher product margin mix that we're able to benefit from, which is also sustainable going through this year. So those are the two biggest items going into first and second quarter and third and fourth as well. So, yeah, I would say those are the items. And the limited guidance or, I guess, framework that we provided for fiscal 2022 is -- it's -- those benefits that are going to help us sustain the margins that we were able to realize in fiscal '21 going into 2022 for the full year, even as we have some headwinds with freight, which everybody is talking about.

So, the positive is that the initiatives that we have ongoing is -- is what's going to help us mitigate those head -- headwinds on freight. So, hopefully that answers your question.

Brian Nagel -- Oppenheimer & Co -- Analyst

That's help -- that's helpful. And then my second question You know, and Shawn you talked about the -- the product launch again but I -- so, I guess maybe just to understand clearly more the -- the timing of that because I -- I wasn't -- I -- I didn't -- I didn't -- I mean I have missed it in the -- in the comments but also --

Shawn Nelson -- Chief Executive Officer

Yeah. OK.

Brian Nagel -- Oppenheimer & Co -- Analyst

Also, the one that you know -- so, with -- with regard to the -- the guidance or the -- the framework you gave for sales growth for the current year, what's in that? How much if there is an expectation or some type of performance of the new product? Sorry, Shawn, go ahead.

Shawn Nelson -- Chief Executive Officer

Yeah. First of all, there's no expectation for the performance of the new product in our sales guidance for this year. We do expect to be able to announce and -- and launch the product in this fiscal year. But we've been conservative with our outlook to that end.

And so, until we have a firm understanding of -- of exactly when we'll be in an inventory position to -- to support our expected sales, we -- we'll just put off the announcement of that product until -- until that time. But we do expect to be in this fiscal year.

Brian Nagel -- Oppenheimer & Co -- Analyst

Got it. Thank you. Congrats again.

Shawn Nelson -- Chief Executive Officer

Thank you.

Donna Dellomo -- Chief Financial Officer

Brian, the only thing I would add is I just want to make sure that -- that it's clear that that scenario that we gave, the 20%, is not necessarily guidance. It's just something for you to build a framework around. So, I just want to make sure that that's -- that's clear.

Brian Nagel -- Oppenheimer & Co -- Analyst

Yeah. And we hear you.

Donna Dellomo -- Chief Financial Officer

OK. Great.

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

Great. Congrats on strong numbers and thanks for the questions. I wanted to go back to sort of gross margin expansion point. Sort of more broadly, what are you seeing in consumer behavior or maybe the competitive landscape now that -- that's allowing you to discount a little less over the past couple of quarters? And then I have a quick follow-up.

Jack Krause -- President and Chief Operating Officer

Sure. Thanks. Thanks for the question. This is Jack, of course.

A -- a couple of things, one is we're seeing a benign promotional environment. We've seen it, especially if -- if you look at some of the more premium brands that -- that target. The types of customers we target are -- are all stating a benign promotional background. We also are seeing significantly increased rates of conversion through our -- our funnel and I think that alludes to some high levels of stickiness and -- and brand traction we're getting now.

Beyond that, we can't tell you exactly what's going to happen in the second half, obviously, but we feel very good right now about the trajectory and the ROIs we're seeing. And we continue to also get gross margin improvements due to product mix and -- and getting our quick ship fabrics sourced at higher margins which has been critical to our business as well. So, we still have a learning agenda, we have other opportunities to pull levers if we see there are opportunities, and we'll keep you posted.

Maria Ripps -- Canaccord Genuity -- Analyst

Got it. That's very helpful. And then maybe on the advertising front, can you talk about sort of how you're thinking about balancing national spend versus more localized approach sort of targeting specific markets? And maybe more broadly, any thoughts around brand spending which is direct response as you're heading 2022? And sort of in the past, you talked about sort of delivering higher advertising ROI in markets where you do have showrooms. Has that changed for you over the past year or so?

Jack Krause -- President and Chief Operating Officer

So, a lot of questions in there. I'll start with the most recent one. So, we are -- we are seeing significant impacts of touchpoints in driving our -- our total revenue and our ROIs. So, the touchpoint strategy is as important as it's ever been.

I think what the world right now challenges us to think about is how do you become more efficient in developing touchpoints where customers can experience the product, feel how good it is, and make the final decision. So, we're continuing to see synergies from touchpoints, we're seeing -- we're continuing to see increased ROIs in markets that have more touchpoints. And in fact, if you really look at the year on two-year stat comps, you'll start to see a lot of strength growing overall in all the quarters. And it's really -- when we see a significant lift in e-comm, we'll see perhaps a little bit of a dip in the physical touchpoints, but it goes vice versa.

So, they're really supporting each other and more and more interdependent, especially if you think about the -- the journey -- the journey is just intertwined right now. So, it's really hard to separate a digital versus physical journey. And I think the key will be how we get smarter about handling it in the long run. I think in terms of the way we're looking at our markets, we certainly -- we certainly look at our markets in terms of ROI by market and efficiency, and we apply that to the national spend is incredibly efficient and continues to allow us to -- to do to get a breadth of -- of communication we need to.

However, we are seeing increased levels of digital spend as being very effective in markets as we -- as we focus on expanding those markets. So, I think -- I think what you'll see is the continued mix of national and digital. They're synergetic -- synergistic as well. So, obviously, the -- the more national spends are the top of the funnel.

And as we get into the middle of the funnel, those digital spends really help us nail it. And right now, while we're seeing an increase in overall cost at the national level and media, I think because, you know, the economy's coming back, the brand stickiness, and the efforts at the digital level are increasing our conversion rates. So, we really see sort of a continued positive in our ROIs based on looking at the combination of the national versus local spends.

Operator

Thank you. Our next question comes from the line of Thomas Forte with D.A. Davidson. Please proceed with your question.

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

Great. Thanks for taking my questions. So, one question and one follow-up. So, Shawn at a high level, what's your goal for the pace of innovation including major and minor innovation? And then what role does the showroom play when it comes to showcasing new products to consumers?

Shawn Nelson -- Chief Executive Officer

Yeah. Our -- our pace for innovation hasn't changed. Our goal is for, you know, roughly every couple of years to be able to put out something major. And in between, continue with minor innovation that -- incremental innovation that allows us to increase our average order value, allows us to continue to make our platforms more sticky, more interesting, more competitive in the landscape.

Nothing's changed there. We will obviously begin our -- our major innovation rollouts as a public company with -- with the one that we continue to talk about for this year. And we'll be back with more news on that once we have a firm grasp of the timing. But again, expecting that to share.

In terms of the showrooms' role in putting these out there, that's really our whole strategy. We invent things, our -- the things that we invent through this Designed for Life approach to product design are very unique. And even though they're meant to look like the things we're familiar with, and Sactionals is the best example of that, looks like the Sactional stuff outperforms very, very differently and requires some hands-on understanding. Showrooms and touchpoints, it's probably a better word as Jack alluded to.

And if you -- if you heard some of the things that he talked about, we have a lot of new touchpoint tactics emerging that will be very exciting and allow us to bring other things to market as they unfold.

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

Excellent. All right. So, for my follow-up question, I want to hear, Shawn, your current thoughts on international expansion, including, you know, the opportunity to enter English-speaking markets at Canada, U.K. with either a Lovesac showroom model or potentially a shop n' shop one or the Costco warehouse opportunity.

Shawn Nelson -- Chief Executive Officer

Great question. It's something we continue to be excited about. It's something that we continue to research and it's something that we are not prepared to announce our -- our exact intentions other than to say it will happen someday. We have products that we think will resonate in many other markets.

We have patents for many of these products filed and -- and issued all around the world and we continue to issue more patents internationally as well in preparation for that, but nothing to announce yet.

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

Great. Thanks for taking my questions.

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. I'll add my congrats on -- on a fantastic closed surrogate year. The first question I have, Shawn or Jack, maybe if you can help us understand where you think the brand is in terms of consumer awareness and recognition. And I ask this one in the context of, you know, now a couple of quarters consecutive -- consecutive quarters of putting up marketing that is generating better ROIs with seemingly not as much needed investment.

So, is the brand at a point -- at a tipping point where consumers are coming to you without that teaser from the marketing advertising perspective?

Jack Krause -- President and Chief Operating Officer

It's a great question. I mean, there've been so many dynamics going on this year and some back -- and some tailwinds. It -- one would like to say the stickiness of the brand is starting to -- to appear in terms of increased conversion rates. Awareness rates, may be slightly going up but not significant.

However, you know, this is a category that has, generally speaking, low-awareness levels for products until people are engaged. So, we'll have to really watch that as well. But -- but I think, you know, I think there is some stickiness. I think the conversion rates reveal that and, you know, more to come.

Camilo Lyon -- BTIG -- Analyst

Great. And along that front, also within the context of the overall commentary around increased investments or a return of postponed investments, what is the balance that we should think about with respect to investment and EBIT margin flow through? In other words, should you see an improvement to the kind of the -- the architecture or the outline that you provided from a sales perspective of I think low-to-mid 20s? Should you exceed that where you reinvest further or will you let that drop to the bottom line? What -- what's the -- what's the mentality around flowthrough given that you've got multi -- multiple years of investments, longer-term growth opportunities in front of you?

Donna Dellomo -- Chief Financial Officer

I -- I could grab that one. Yeah. So, our -- our goal is to continue to reinvest, right? The goal is to -- we -- we put a substantial amount of investment on hold last year for the -- all the right reasons. So, our goal would be to -- to -- if we surpass our internal projections, they will be to reinvest back into the business.

Camilo Lyon -- BTIG -- Analyst

Got it. And then, Donna, one more for you. Just on gross margin and more specifically on tariffs. Can you just update us on where you are in the mitigation effort? Have you fully sold through the tariff-affected inventory, or is there still some drag that we should expect to see? And -- and is that being fully mitigated by the rebate that you're receiving from your vendor partners? And then just final -- final point on that is where is the East Coast D.C.

at right now from an operational capacity perspective? Is that now fully up and running.

Donna Dellomo -- Chief Financial Officer

Yeah. I'll take the East Coast first. Yeah. So that is fully up and operational.

It's a -- a magnificent facility for us over -- it's about 800,000 square feet. But it is, it's fully operational. As far as the tariffs, we still have inventory coming in that is impacted by tariffs as we -- I would say that we -- we've leveled out our supply chain overseas, we still have inventory that's coming in. And I would expect us to continue to have inventory come in from China.

So to have a portion of our inventory that is impacted by tariffs until tariffs fully go away. As far as the mitigation, I wouldn't say that they're fully mitigated by vendor rebates and pricing discounts, but there is a big portion of them that that -- a big portion of that that is being mitigated. But also the help -- or I guess, with the -- with the decrease in promotional discounting, that's helping to mitigate the tariff impact as well. So overall, we still will continue to bring inventory in from China.

And as long as China has the tariffs, we-we will -- we will be impacted by tariffs.

Camilo Lyon -- BTIG -- Analyst

Got it. Very helpful. Thank you, and good luck this year.

Donna Dellomo -- Chief Financial 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 questions. Just in the context of the low to mid-20% framework that you guys provided, curious if you could maybe help us with how we should be thinking about AOV growth in fiscal '22? I know Jack said, I think, up 11% this last year. And then also, it would be helpful to understand sort of what we are assuming in terms of contribution from the other revenue line.

I -- I noted that you mentioned a 15-store expansion with Best Buy. So how much of that would be factored into the theoretical outlook that you guys gave?

Jack Krause -- President and Chief Operating Officer

Donna, you want to give that -- cover that one?

Donna Dellomo -- Chief Financial Officer

Yeah. I can -- you could grab the AOV one, I'll grab the -- the contribution. So again, this -- the -- the 20 -- mid-20 is just a framework, right? It's -- it's not meant to be guidance. But we are not in our internal projections.

We're considering the Best Buy expansion as an upside to our internal model. So that the 15 or so Best Buy shop-in-shops that Jack mentioned, again, is an upside to our internal projections. So we're -- we're operating on internal projections on our own showroom expansion as well as the expanded Costco online, we'll call them temporary roadshows, that are happening. So again, that's all -- that would be all upside to the framework that we provided.

Matt Koranda -- ROTH Capital Partners -- Analyst

OK. Got it. And then on the AOVs, maybe, Jack?

Jack Krause -- President and Chief Operating Officer

Yeah, yeah. But, yeah, I would say, you know, there may be some -- some growth in AOV, but it won't be as robust as you saw last year. And, you know, that really depends, too, on some of these other initiatives if they get activated or not. So as we go throughout the year, I think we'll be able to give you more insights on how that works through.

Matt Koranda -- ROTH Capital Partners -- Analyst

OK. Got it. And then on -- on the CLV to CAC -- and I mean, I noticed, obviously, you guys noted it hadn't changed much. But underneath that, I assume there are some -- some substantial changes potentially with CAC, just given the marketing spend from this last year and -- and sort of maybe the return on that CAC that you're getting.

So maybe I just want to give you guys the opportunity to kind of unpack that a bit and talk a little bit more about sort of the changes underneath the CLV-CAC ratio that you gave.

Jack Krause -- President and Chief Operating Officer

Yeah. I mean it -- it was basically flat. So what we saw was the customer acquisition costs that -- that did go up, and it went up similar to the value that we sell for the first year customer value going up. So, you know, it's continuing to be really impressive, and there is, obviously, in that kind of level.

There's a lot of room for expansion. A lot of companies will -- will go with a significantly lower CLV to CAC, as you know. So we have a lot of room for expansion. And -- and I would say right now, based on what we're seeing with conversion rates and everything else, and some of this belief that the brand may getting -- be getting stickier that I don't see we'll -- we see any significant challenges to a ratio like that in the upcoming year.

Operator

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

Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst

Great. Thanks very much for taking my question and congratulations on your goal also to -- to achieve a 100% circular and sustainable business model. You know, I wanted to ask a little bit more about that. It seems like a pretty -- pretty ambitious goal.

Can you talk about some of the investments that you're going to need to make between now and 2040 to get to that goal of zero waste and emissions? And what are some of the kind of internal sort of targets and metrics you're going to have along the way as you -- as you kind of move toward that goal?

Shawn Nelson -- Chief Executive Officer

Great questions. I appreciate the focus. It's something that we are passionate about and -- and focused on -- and -- and perhaps, I hope, passionate about in a different way than -- than some companies. We found that the Designed for Life philosophy in the way that we design products has not just been a nice thing that, you know, generates more sustainable products that makes us feel good.

We found that positioned correctly, it -- it is the basis for our -- it is -- it is the -- it is the basis for the value of our products. It's what drives the stickiness of our brand. It's what drives a lot of consumer, I think, the excitement around our -- around our brand and drive sales. And -- and therefore, you know, the sustainable business model becomes good business.

The same will be true, we believe, for CTC, a business model that is not just focused on sustainability, but focused on a circular relationship with the customer, where they have a real relationship with our firm. The things they buy and the way that we deliver it to them, the way that we interact with them becomes not just, again, in pursuit of sustainability and ESG goals, but a -- a real relationship that becomes more fruitful and again, is -- is really great for business. That said, there are many components to a circular business model. It is a very ambitious goal.

We recognize that, and there will be myriad investments to make over the next 19 years as we -- as we approach getting to zero waste and zero emission. So I don't think there's time on this call to -- to possibly list them all, but I -- I will say, we'll begin with the business model. As we -- as we develop these programs that will allow us to help consumers trade our products among themselves in productive ways, help, you know, take back or -- or trade in products as they upgrade it. For instance, as we launched the storage seat, good example, people's question was, "Hey, I've got regular seats.

Might I be able to trade them in?" The obvious answer for a circular business will be yes, and we will obviously be able to redeploy those. As an -- you know, these -- it's -- it's the operational components of the business that we'll be focused on that will actually drive, we believe, more goodwill for our brand and more business. And -- and those investments will come first as we attempt to get to zero waste and zero emissions, there will be many more on the -- obviously, the supply chain side, the manufacturing side. It's an entire business model.

That's why we've given ourselves so much time. Our goal is not to be complacent, but instead to really approach it holistically, and we think in -- in a novel way, and we're really excited about -- about where that's going to come. And because we've committed to growing profitably and continuing to grow rapidly, we'll need the time to spread those investments out over a long period of time.

Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst

That's terrific. Thanks very much, Shawn.

Jack Krause -- President and Chief Operating Officer

And just -- just to add a little bit to that. I think as we have this knowledge of our strategy long term in terms of CTC, and as we start to really look at sharpening our business model, having that vision is allowing us to do things significantly earlier than we would have and consider our options in a wider view. For example, I'll just throw this out there. Without -- in the absence of a CTC approach, a concierge may only be considered a selling tool.

In the context of what we're trying to do, it could become a post-purchase tool in terms of trade-ins, in terms of cover switch-outs, in terms of refurbing. So it becomes a really interesting approach as we apply to all the -- the levers we're trying to test right now and finding some very interesting ideas in there. So a lot more to come, but that's an example of how this will drive our real operating business forward. And we believe we can do it and continue to be profitable, but also be more and more impactful on the environment we're in.

Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst

Thanks, Jack.

Operator

Thank you. Our final question this morning comes from the line of Lamont Williams with Stifel. Please proceed with your question.

Lamont Williams -- Stifel -- Analyst

Hi, good morning. Just have a quick question on -- on inventory. Could -- could you just talk a little bit about how you're feeling about your current inventory position for Sactionals and Sacs, given the strong demand you're seeing as well as the -- the supply chain headwinds that are impacting the industry?

Jack Krause -- President and Chief Operating Officer

Yeah. I'll -- I'll start a little bit of that, Donna, and you can probably finish. I think one of the things we're super pleased about is the -- the promotional environment being softer than we expected prior to the year in our ordering. So it's allowed us to be very efficient in terms of driving revenue, with less units going out than originally expected.

So I think that -- that's going to help us in supply chain. And I think we've been very aggressive in terms of the team ordering early for the end of the year volume. So we will be increasing inventory, I think, at rates that -- that help us with expectations of probably, you know, four to six weeks of delays in one way or another throughout the supply chain. It will be covered by us ordering early.

And -- and I think the other thing that Donna mentioned is some of those tariffs still coming out of China are part of an overall strategy where we have a lot of sources right now, working a lot of redundancy, which is really helping us feel pretty good about how we can fulfill the expectations on the Series Six business.

Donna Dellomo -- Chief Financial Officer

Yeah.

Lamont Williams -- Stifel -- Analyst

OK.

Donna Dellomo -- Chief Financial Officer

And we are definitely strategically placed. I think I've mentioned on a couple of calls that, you know, we -- we typically maintain a 12- to 16-week in-stock inventory position. So we're -- we're really strong on our inventory levels. We will continue to be where we've got the warehousing.

Everything is aligned to make sure that we -- we are mitigating whatever we see coming down the pipe. So very strong processes internal -- internally around the inventory in all conditions.

Lamont Williams -- Stifel -- Analyst

OK, great. Thank you. That's helpful.

Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Nelson for any final comments.

Shawn Nelson -- Chief Executive Officer

Thank you so much to all of our Lovesac employees and investors who have supported us through this tumultuous year. We're very pleased with our results and excited to continue the conversation as this new fiscal year unfolds.

Operator

[Operator signoff]

Duration: 68 minutes

Call participants:

Rachel Schacter -- Investor Relation

Shawn Nelson -- Chief Executive Officer

Jack Krause -- President and Chief Operating Officer

Donna Dellomo -- Chief Financial Officer

Brian Nagel -- Oppenheimer & Co -- Analyst

Maria Ripps -- Canaccord Genuity -- Analyst

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

Camilo Lyon -- BTIG -- Analyst

Matt Koranda -- ROTH Capital Partners -- Analyst

Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst

Lamont Williams -- Stifel -- Analyst

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