Lovesac Co (LOVE) Q3 2021 Earnings Call Transcript

Greetings and welcome to The Lovesac Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Rachel Schacter of ICR. Thank you. You may begin.

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 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 measures to such non-GAAP financial measure has been provided as supplemental financial information in our press release. Now, I would like to turn the call over to Shawn Nelson, Chief Executive Officer of The Lovesac Company.

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 amidst 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, sales will also 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 in a variety of formats, including walk-in, appointment-only, and virtual. The strength of our showroom performance is reflected in Q3 with a 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 release 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 Sactional platform. We continue to be excited by the alignment of the Best Buy customer demographic with our own, especially in terms of their intent to buy within the home category. As you're aware, there are widely recognized headwinds we are navigating in 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 ROI above our expectations. From a profitability perspective, our results came in well ahead of our expectations due to a 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 this 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, have only magnified during the pandemic as increased time at home has led to increased spending on the home. The swift pivot to entirely digital when showrooms were closed, followed by a return to our omnichannel model, has provided us with tremendous learnings. We have very current market research that helps us understand the subtle differences between our millennial and post-millennial customers and how they are spending during the pandemic. We're tweaking our messaging and marketing tactics to fit these learnings. We've 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 2 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. We will ensure 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 this very strong ROI as Jack will discuss. Despite the pandemic, we remain 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 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 side, 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 improvements. 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 the reduction of furniture waste in landfills. This endeavor has been core to our DNA since the inception of our company guided by our design for life philosophy, with substantial progress to date, including sourcing all of our upholstery fabric from 100% recycled plastic and repurposing over 20 million plastic bottles in the 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 humankind 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 in 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 a 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 is temporary as sales return and so also will costs including marketing overhead and headcount. As we begin the fourth quarter, we believe we're 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 the 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.

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 touch point during this 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 rollout to temporary online pop-ups, which have lasted approximately four weeks ending in September and October and generating $7.7 million in total volume. They also have a third show running now through December 6th. Importantly, our partner channel business development overall grew and profitability to 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 efficient 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. Our showrooms serve as great amplifiers for our brand and the return of our marketing spend. Each one we opened is worth approximately one 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 non-linear 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 into non-linear media as part of our buys as both have a role. New merchandising approaches enabled us to build higher margin sales that were seen in our results. Our strong media and brand traction enabled us to deploy fewer promotions as driving brand awareness draws in new customers to the business who are highly qualified, resulting in conversion rates in both retail and online that are some of the highest levels we have historically seen. Additionally, our merchandising strategies have helped to drive higher average order values through product mix towards premium and higher margin covers, as well as higher catchment rates for new products, as Shawn mentioned. For example, a premium Lovesac soft and down insert 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 open in this fiscal year and classified as new, which brings our total showroom opening for the year to 19. In this environment, we continue to learn a tremendous amount and refine our approach to operational excellence. We have implemented increased health and sanitation protocols as part of what we call our COVID operating model to include Plexiglas at the key customer interaction points, positioning 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 customers at lifeline with on-the-spot appointment scheduling that we rolled out in November. This system, which leverages a calendar platform similar to a restaurant reservation system, 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 book appointments seamlessly from our Lovesac.com website. Given the current environment, this feature has 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.

In terms of showroom staffing, as previously mentioned, all showroom managers and assistant managers shifted from traditional showroom environment tier one into a virtual trade area environment tier two during the height of COVID-19, allowing them to sell virtually via podium web chat. Show managers also completed additional training to provide services such as customer love chat, email and phone, as well as return processing. We subsequently improved customer satisfaction scores in our customer love department by nearly 20 points and saw a significant reduction in wait times for refunds, demonstrating the impact of these improvements as we flex and adapt to this new environment. In terms of expanding other channel presence in 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%, compared to pre-launch rates of about 34% of Sactionals purchases that include accessories. Accessories are now part of the purchase process with the customer building their own setup. Continuous improvement and functionality has been added to the site since launch, including faster load times, configurator pages, appointment scheduling for showrooms, save configuration functionality, and additional customer experience improvements. 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 risks in our supply chain. Our regional distribution center in California is fully operating at 150,000 square feet. We are on track to open our East Coast warehouse at the end of this fiscal year. Additionally, we are engaged in a multi-phase 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 sectional 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 build the processes and infrastructure to deliver sustainable brand growth and profitable growth. As we look to the all-important holiday selling season, we're continuing to leverage our growing media spend and 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 work 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.

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 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 sale and the 25.5% increase in comparable showroom sales. By product category, our Sactional sales increased 46.8%. Our SAC 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 the 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 last call with the upside primarily driven by less promotional discounting and more favorable product mix than we had anticipated. Additionally, we realized benefits from vendor rebates in the third quarter that we previously expected to come in Q4 and the expected step-up in freight and warehousing costs was lighter than planned due to shifting time of 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 rent associated with our 107 showrooms, an increase in equity compensation related 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 due 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 customer initiatives we have planned for the fourth quarter. Depreciation and amortization increased $176,000 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 increases as well as SG&A leverage, as 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 fiscal 2021 and 2020 was not material and relates to minimum state income tax liability. Before we turn our attention to net income 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. We have large volume holiday shopping days still 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 where 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 fewer 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 the CapEx will be in the $12 to $14 million range. In conclusion, we had a very strong Q3 from both a net sales and profitability perspective. 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.

Thank you. At this time, we'll be conducting a question-and-answer session. Thank you. Our first question comes from the line of Thomas Forte with D.A. Davidson. Please proceed with your question.

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 costs. To what extent is that benefit short-term in nature and long-term in nature? And then I have a follow-up question.

Yeah. I'll give a quick comment and then allow Jack to fill in any blanks. It's a dynamic environment, to say the least. I think that, in many cases, particularly in the home category, Lovesac and like companies have been recognized as perhaps COVID-19 beneficiaries with people working from home and spending money on their home. While I believe that much of our success of late has been due to the agility of the team and our ability to react to the environment, we certainly recognize these tailwinds. In our case, rather than seeing just increased sales, as many in the category have seen, in depleted inventories and longer lead times, there are 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. The results have come out for us more toward the bottom line, I believe in the near term. Essentially, we've gotten more for less, having obviously smaller staffs on our front lines, having reduced staff at the very beginning, buckling down for COVID, and also the way that we're spending on marketing has resulted in high and increasing ROIs, partly due to the new tactics, but obviously aided by these tailwinds. Long-term for us, our outlook is to maintain high growth, not just through new product innovation, which will come, but also due to this ongoing test-and-learn behavior that we've demonstrated for a long time and our commitment to marketing innovation. As we get bigger, we expect the tailwinds to trail off, and 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 reaching that critical mass where we can show leverage, at the same time we would expect some of that tailwind to trail off eventually, but time is on our side in that standpoint. I don't think we are ignorant to the COVID tailwinds that are driving our success at this moment, but we haven't let it be a runaway train.

I think you covered a lot from the sort of managing it situation. My observation, if you're just looking at it from a consumer dynamics perspective, is that during the disruption of brick-and-mortar shopping, we clearly became a preferred choice among people who didn't have as many choices as they did before. That tailwind won't last forever and comes with its own costs, but looking at long-term trends, I think the tailwind indicates an advantage for us as it relates to larger trends such as headquarters moving out of metro areas, less emphasis on metro headquarters, and a focus on homes. Educating from home is becoming a trend, as well as working from home. I think home buying is likely to be elevated for the next couple of years. These long-term trends make us feel good about our positioning.

The last thing I'll add is that Lovesac's greatest opportunity and strength in the marketplace is our unique product. 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. The adoption of our platform, which is a sticky platform that drives repeat purchases, and has high customer satisfaction ratings, is something we believe will grow as more people adopt it and as reviews go up and word of mouth increases. This tailwind is significant for us in helping to push us further down that path and increase the speed of that flywheel. That’s a unique aspect of this company.

So as my follow-up, I've been very impressed with the way you've pivoted the use of your physical showrooms, to appointment shopping to drive digital engagement. Collectively, would you say that, assuming things return to semi-normal in the second half of the 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 assuming you re-open them to the extent they were pre-pandemic?

Yeah, that's an interesting question. I would say that while we know there are interesting performances and shifts between performances between the web and the showrooms, we've learned that there's immense synergy between the web and showrooms. Research is taking place online while shops are closing, and showrooms have become a closing opportunity. This means huge opportunities to look at how touchpoints operate and evolve. Our transactions have become more omnichannel, creating additional options for customers with respect to how they shop and engage with us. We believe that will enhance productivity at our touchpoints moving forward.

Thank you. Good morning, everyone. Really remarkable quarter here, so congrats on that. Actually, I think this is the first Q3 since going public that you reached profitability. So I want to touch on that first, specifically on the gross margin front. If you can highlight where we are 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 costs from the distribution center opening here in the fourth quarter. Trying to understand if there's been a pull forward of the overall gross margin expansion relative to the timeframe that had been laid out before; any color on the progress that would be very helpful?

So, the biggest impact on our gross margin expansion is from a reduction in promotional discounting and favorable product mix shifts into higher margin items. Regarding tariffs, we still have about 42% of our inventory purchases predominantly on the cover side coming from China, so we still face some impact there although decreasing. You're seeing year-over-year increases in gross margin largely because of these tariff shifts, but mainly due to the promotional discounting. The startup costs related to our Northeast warehouse are much less than we initially anticipated, and we do not expect significant impact on our gross margin for the remainder of this year or into Q1 of next year from those startup costs.

With the success we've seen from the digital roadshows and the pivot we made during this time, we now feel really comfortable discussing the roadmap from here. We’re pleased to note that our existing partnerships are driving strong growth, and we're assessing opportunities for new partnerships to expand our touchpoints and customer engagement.

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?

We're not specifically providing guidance other than we do expect the quarter-over-quarter increase to be less than the year-over-year increase we reported in Q3. Our fourth quarter has started off strong, but we remain cautiously optimistic. We do have three Costco online pop-ups booked for this quarter, which we believe will contribute to net sales.

Just to confirm, there were no physical roadshow revenues in Q3, we did manage to generate significant sales through the virtual online pop-ups. We plan to test three roadshows in Q4 as well.

In Q3, we had approximately $950,000 in vendor rebates. We do expect a small amount projected to come in Q4, but not to the magnitude of Q3.

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

We are very pleased with the progress of our channel partnerships. We have seen that our profitability has greatly benefited from these partnerships, capturing market share while reducing capital expenditures. The flexibility to partner with established retailers allows us to reach more customers. It's all about driving brand awareness while maintaining our commitment to product quality and customer satisfaction.

Thanks for taking my question. I want to ask about the performance of your new showrooms and whether you believe the openings that took place this quarter were merely an outcome of pent-up demand from earlier this year or if you're finding good real estate opportunities to expand moving forward?

The 10 showroom openings in Q3 were largely determined by COVID-19 impacts and timing, with no original intention to open all 10 at once. We do see opportunities for better lease terms in this environment. The synergy between consumer behavior and our direct touchpoints has increased our choices in terms of where we open as we adapt to evolving market conditions.

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.

Thank you to all of our investors who support us. We are grateful for your continued support. Thanks so much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.