Lovesac – Home Furnishings Strength & Favorable Value
Proposition – 4 August 2021
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Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Kali Dellaguardia (KD)
Former Director, Merchandising at The Lovesac Co
Agenda:
1. Lovesac's (NASDAQ: LOVE) D2C brand positioning across touch-feel points
2. Lovesac's portfolio assortment – performance review and recent innovations
3. Lovesac's channel partners, e-commerce focus and showroom differentiation
4. Sustainability of sales growth and market share dynamics
Contents
Q: Could you give an overview of the home furnishings industry, highlighting any categories that have
accelerated? What are the key drivers and which players are competing with Lovesac?
Q: Could you outline any pre-coronavirus trends? How has the pandemic changed or accelerated those
alongside the huge shift to working from home?
4
4
Q: How complex is the distribution landscape? There are showrooms, channel partnerships and everyone is
going D2C. How has that landscape shifted around getting the product to the consumer?
5
Q: Can you give an overview of Lovesac’s business? How has the company established dominance in some
product categories it operates in?
Q: Could you discuss the showroom dynamic, including the positioning of Lovesac’s showrooms? How do
showrooms enable the company to get closer to the consumer and demo its new products?
5
6
Q: Lovesac has achieved very strong growth in the couch segment, noting that 37% of transactions are repeat
6
customers. Why do you think that is? How sustainable might this growth be?
Q: Could you discuss Lovesac’s ability to promise next-day product shipping, as well as its manufacturing
capacity? What issues did you notice while at the company vs what you think is happening in the industry
today?
Q: How should we interpret Lovesac’s hyper-focus on internet and e-commerce to improve brand
engagement and create opportunities to get the brand out there? We talked about the significant increase in
showrooms.
Q: Could you outline Lovesac’s product offerings, including the number of SKUs it has? It seems slightly
limited in scope, but the company is experiencing strong growth and demand in many categories. How do
you think it considers opportunities to innovate beyond the traditional Sactional products? Do you think it
could innovate elsewhere or is it stuck to this core product that is driving growth and leveraging volume?
Q: How do you think Lovesac considers its geographical footprint for showrooms, which currently spans 35
states? How might it approach a new area, whether densely populated or rural?
7
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Q: Are there challenges with entering more rural areas, such as around price point? Could you suggest some
trends around Lovesac’s ability to continue to keep prices at a more premium area?
9
Q: It seems in-house financing and assistance with financing a purchase is a big draw for consumers. Could
you give an overview of that dynamic? How much does it impact purchases?
9
Q: Could you highlight some of the key factors pressuring Lovesac’s margins? The company seems to benefit
9
from a very healthy margin profile. How do you think it achieves that?
Q: Have you ever noticed pressure from the supply chain or aspects that can’t normally be taken into
account such as freight costs? How much variability or flexibility is there to manage margins when lowering
pricing to drive volume?
10
Q: What differentiates Lovesac’s showroom model, considering the company’s hyper-focus in this channel?
How does that compare to competitors in home furnishing?
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Q: Could you outline some of the other touchpoints in Lovesac’s overall channel strategy? How did
partnerships such as Best Buy
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Q: How would you assess Lovesac’s design efforts? The company is collaborating with Prophet NYC on every
branding effort. Could you discuss the branding efforts in stores and the wholesale approach with third
parties?
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Q: Could you discuss some of Lovesac’s biggest or most prominent customers? Who is the company trying to
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win market share from? Where does it identify the most risk?
Q: Can you suggest Lovesac’s approach to opportunities outside of the US?
Q: Could you outline Lovesac’s big push to target social media channels? Is it something that the broader
industry is coming to terms with or do you think Lovesac is ahead of the curve here?
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Q: Can you discuss the seasonal nature of Sacs or Sactionals sales, including any trends that might enable us
to better anticipate Lovesac’s promotional activity? Do you expect demand to stay high over H2 2021? Are
we approaching a point where large purchases will scale back, leading to increased promotional activity?
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Q: Where do you think Lovesac could innovate successfully? Sacs seem to be doing well but, as you said,
their pricing is plateauing. Where else offers opportunities to build a strong presence?
Q: How do you think Lovesac considers new home starts and people remodelling their homes in different
areas? How important are some of these factors to Lovesac’s long-term growth?
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Q: Sactional seems more of a residential or at-home product. Is there opportunity in more of the commercial
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side? How does Lovesac consider that, or does is it not really exist?
Q: Can we revisit Lovesac’s ability to build out inventory ahead of time vs the industry, given there have been
so many supply crunches? How does the company’s playbook differ from traditional models you have
experienced?
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Q: Are Lovesac’s promises around lead time and next-day shipping limited to a few colourways or SKUs,
rather than the full catalogue?
Q: What impact does stock availability have on pricing and consumer willingness to purchase? Is it usually
higher-end models that are in stock, so consumers wanting something more lower-end might lead to some
attrition? Are consumers typically patient and willing to wait for products?
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Lovesac – Home Furnishings Strength & Favorable
Value Proposition
Transcription begins at 00:00:06 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled Lovesac – Home Furnishings Strength & Favorable
Value Proposition. I am Nyree Hinton, and I’ll be facilitating today’s Interview with Mrs Kali Dellaguardia,
former Director of Merchandising at The Lovesac Company.
Kali, before we get started with today’s Interview, please state I agree or I disagree to the following statement:
You understand the definition of material non-public information and agree not to disclose any such
information or any other information which is confidential during this Interview.
KD: I agree.
NH: Could you start with a brief introduction to your background?
KD: Regarding Lovesac, I was last employed around two years ago at Lovesac in a Director of Merchandising
role. In that role, I was responsible, or primarily responsible, for three main functions, assortment planning,
promotional planning and visual merchandising. I was at the company for about three-and-a-half years and
with them during their IPO process. Prior to that, I had various buying roles, mostly fashion-oriented and
more fast-moving luxury businesses, but a buying history for around 15 years.
[00:01:18]
Q: Could you give an overview of the home furnishings industry, highlighting any categories that have
accelerated? What are the key drivers and which players are competing with Lovesac?
KD: Obviously, during COVID, I think everyone has seen that the home industry has really been doubling
some of their business, especially on the web and in the e-commerce channel. Obvious, big competitors are big
furniture brands like Pottery Barn, Restoration Hardware. They’re all doing really, really strongly, and again, I
believe most of their sales are driving out of e-commerce. Similarly with Lovesac. Lovesac, obviously, has two
main products, and it’s their Sactionals and their Sacs. I believe that they’re more of a leader in sacs in terms
of competitors. There are Yogibo and some various other brands who try and compete, but none of them have,
I think, the same luxury model as Lovesac does. In terms of compatibility with their Sactionals, Lovesac has
really a unique model in terms of their configurable furniture, but some other brands who have been
participating in the same space are brands like Restoration Hardware, who has a function of that. Pottery Barn
has a function of that. Even brands like Ikea are doing that. Joybird, who’s really more of an exclusive web
retailer, is trying to play in that space as well, and all their business has been strong but again, lots of those
companies offer other things beside Sactionals that can help push the brand. I believe that Lovesac is
singularly really driving a brand that really only runs or does couches in a big way.
[00:03:11]
Q: Could you outline any pre-coronavirus trends? How has the pandemic changed or accelerated those
alongside the huge shift to working from home?
Private and confidential 4
KD: I think a big trend that I was seeing in our competitors, as well as within the brand, has been more tech-
focused things. If you can think of being able to work from your couch vs having to work from a desk or having
to work in your kitchen, for instance, on an island, there are tech-focused things that are getting more
incorporated into your couch, things like accessibility to a USB port or a charger, without having to leave your
couch. You’re seeing a lot of that, massage functions within your main couch or big recliners or what have you,
so playing in that space a lot. Sustainability, where I think people have been even more conscious since they’ve
been staying more at home, about what that eco-space looks like and how they’re using it. I see lots of brands
talking about that, and they were talking about that before as well, but it feels like it’s become a bigger focus
since COVID started, and I can speak to aesthetic trends, then the use of natural materials. That may or may
not tie into the whole eco-structure, but there are lots of natural materials being used in aesthetics, and really
that’s on the trend.
NH: Could you elaborate on what is driving the natural materials trend? What are some benefits or drawbacks
of that?
KD: For me and seeing it in markets, so part of my job at Lovesac was I would go into market because I was
responsible for building the throw pillow and the blanket line, and that wasn’t a huge facet at Lovesac and
honestly didn’t drive a lot of sales. It was primarily used to dress our showrooms, but you saw a lot of it as an
aesthetic trend, like anything else. Prior to that, it was a big trend around more African or tribal-looking
prints, and then it started to move into lots of bambooing, like wicker bambooing around your furniture,
which you’ll see a lot more now. You’ll see lots of marble, like a marble texture, whether it’s in accessories from
coasters for your drinks, to being used in kitchens. More of a nod aesthetically to some more natural materials,
lots of greens, lots of plants, in that direction really.
[00:05:52]
Q: How complex is the distribution landscape? There are showrooms, channel partnerships and everyone is
going D2C. How has that landscape shifted around getting the product to the consumer?
KD: I’ve been out of the space, or out of Lovesac for maybe two years now, but there were lots of distribution
challenges in general, coming from, especially if you are distributing in the US, beginning in sourcing, and
things getting sourced out of China with some of the big tariffs that the old administration had placed with
China on some of our imports coming in from China and coming in from Asia, period. We had some
challenges there in terms of sourcing, and I know that that’s hit other competitors at the time. If you were
shopping with them, you had all of these excess lead times than what you were used to. You can see it now. If
you’re shopping home, lots of companies are running out of lots of things, and that’s really getting to the
source of the distribution in terms of lead times, in terms of what those challenges are. In showrooms, for
example, I was responsible for visual merchandising. We had to be very nimble in terms of how we were
addressing our showrooms and what we were sending there, and you could have planned this one item as this
big, key item but really have to shift and merchandise with what you had left.
I don’t think that it’s been affecting, say, channels differently. It’s going to work the way you treat e-comm vs
your brick-and-mortar stores. The product is going to be the same and the distribution challenges are going to
be the same in both, but I think that you’d probably shift a little bit more priority into an e-comm channel for a
direct DTC sale that would go a little bit more quickly than allocating it into a brick-and-mortar space where
you can dress it up and be a little bit more creative that way.
[00:08:00]
Q: Can you give an overview of Lovesac’s business? How has the company established dominance in some
product categories it operates in?
Private and confidential 5
KD: Just my opinion, but I believe that a lot of it wages on the patent that they have on what they have there.
Their modular couches, say they’re patented, for example, it takes at least seven years for another company to
go ahead and duplicate some of what they’re doing, and by that time, they could have already created another
function that’s very unique to their couch that’ll take another seven years to patent there. The couches were
extremely unique in their modularity. If you looked at some of our competitors, you could change a left chaise
or a right chaise. You could maybe change out the way your back fits, but you were really restricted in terms of
the amount of different layouts you could do with Lovesac. It’s literally endless. It’s the way the dimensions
and the way the furniture fits together. You can go anywhere from buying, say, a love seat if you’re living in an
apartment, it’s your first space, your first couch, and you can take that with you, and I’ve done that personally,
into a bigger space, and just build on it and build on it. You can give away or you can give a love seat to a child
who’s going away to college and still have a couch and just give away certain pieces there.
There’s lots of flexibility that you have with a Lovesac couch that you do not have with any of our competitors,
and that’s still the case now, and I believe that’s still going to be the case at Lovesac, as Lovesac continues to
create things that will only fit back to their product. I think that they have a niche there. In terms of their facts,
they’re able to charge the really high prices that they do. It’s probably USD 1,000 to get their SuperSac, which
is one of their more popular Sacs with more of a luxurious fur cover on it, and there’s nobody else who’s trying
to duplicate that. You have some who are making versions of it at a cheaper price point, but the foam that’s
used inside Lovesac Sacs is patented. I think that that’s one of the big competitive advantages that they have.
[00:10:19]
Q: Could you discuss the showroom dynamic, including the positioning of Lovesac’s showrooms? How do
showrooms enable the company to get closer to the consumer and demo its new products?
KD: I think that the rate in which they were opening showrooms then, and maybe a little bit now, is still
alarming, from a money investment perspective, especially since you see lots of the movement and the trend of
sales going into more of the e-comm and DTC channel, but Lovesac continues to open stores. I feel like when I
was there, when I first got there, they were at maybe 40, and by the time I left they were at 80, and I know that
they’re moving upwards of 100 now. They’re continuing to build the showrooms and I think it goes in contrast
with what the trend direction is across the home industry, but I think that in Lovesac’s case, it’s really
significant to have what they call a demo and to go into the store and to be able to demo the product, not just
sit on it. If you’re spending USD 3,000-4,000 on a couch or on anything, it’s important that you see it in
person, but I think that for a Lovesac, the key unlock is during the demo in the first moment when they pull
out the clasp and you can see how easy or how hard it is to put one of these couches together. It’s the key
unlock to really see how easy it is to change your couch and to change the layout, and I think that that’s an
important sales tool for Lovesac, and I believe that in addition to visibility, that’s the reason why they keep
opening showrooms.
[00:12:04]
Q: Lovesac has achieved very strong growth in the couch segment, noting that 37% of transactions are repeat
customers. Why do you think that is? How sustainable might this growth be?
KD: I was honestly surprised to see that number. I thought it was closer to 28% or 25%, but I think that
probably, the key takeaway with why Lovesac is able to do that vs, say, another company, another sofa
company or furniture company in particular, is because Lovesac builds their couches in a way where you don’t
just have to get rid of it and buy a new couch, which would only happen, who knows, every seven or eight
years. They build it in a way where you can continue to add onto this couch. Whether it’s you changing your
cover, they sell covers separately, whether it’s you making it bigger like we spoke about earlier, and making a
Lovesac into a full sectional or Sactional, or whether it’s you buying accessories for it. They came out when I
was there with the cord that you’re able to insert, a USB cord where you don’t have to leave the couch. I would
imagine that they have other similar things in the pipeline, in order to continue to build on this one couch. It’s
Private and confidential 6
their model. Their model is going to invite clients back in a way that other couches will never do, based off of
the whole couch function. I wouldn’t imagine that a lot of those repeat customers are coming back for Sacs
because they don’t have the same opportunities, but Sactionals certainly do.
To answer your question directly, yes. I think that in the short term, short-term meaning the next five years,
Lovesac is going to continue to innovate and create things that are going to bring those customers back to that
couch. I think that customers are just starting to interface and starting to understand the brand and starting to
buy new couches now, and I would imagine there are certain things, certainly things in the pipeline, that are
going to come as add-ons for those customers, even if the price point for that purchase is going to be smaller.
[00:14:25]
Q: Could you discuss Lovesac’s ability to promise next-day product shipping, as well as its manufacturing
capacity? What issues did you notice while at the company vs what you think is happening in the industry
today?
KD: I think while I was there, that was one of the biggest challenges, that and managing gross margin, which I
imagine we’ll get into a little bit later, but one of the biggest challenges while I was there, and I didn’t work on
the supply chain side, but I was in more of a planning role, and I was merchandising for the showroom, so that
was important. I think that they struggled a lot, and they’ve gone through two or three people leadership
positions since I’ve been gone, on more of the supply chain side, trying to anticipate the big demand surges,
which they would see based on some of the flash sales and other activity that they had, for someone who’s a
little bit better at being able to forecast and demand that. Then there were also things that were outside of
their control again, like with tariffs, and what that ended up doing to business, and being able to be proactive
about that. I know that one thing that they did publicly is they opened up another factory in Vietnam, which
really helped, until they were able to mitigate some of the issues in China. I think they’re in a much better
place than they were. I think that there are more challenges around the experience once it gets home to the
customer in XPO and how it was being delivered.
They moved to a model where they were delivering in these individual boxes. Say, you got a regular sectional,
that could be 14 different pieces. They were delivering it in individual boxes, which is good because you could
bring it into your home, and you could fit it through your door frame a lot easier. It’s easier to manage on that
level, but then it could present challenges if you were alone at home, trying to set that thing up. There were
some challenges with XPO, but in terms of the supply chain side, I do think that they’ve mitigated a lot of that,
and I know I’ve seen a lot less confusion and a lot less customer enquiries and complaints, just being someone
who watches the business since I was there.
[00:16:48]
Q: How should we interpret Lovesac’s hyper-focus on internet and e-commerce to improve brand engagement
and create opportunities to get the brand out there? We talked about the significant increase in showrooms.
KD: Yes, there are two different components when you talk about e-comm. In terms of brand engagement,
they’re going to try and do that via their marketing, via their social behaviours, and that was actually headed
by somebody different than the person who ran e-comm. You had e-comm-specific marketing and then you
had the brand person who actually is the person who I reported into, and the e-commerce person wasn’t
necessarily responsible. She was responsible for, say, digital ads, and being able to get that footprint in terms
of conversion, but the other person, the person responsible for brands was really, as a whole, responsible for
driving exposure into the brand, which I think he did a great job at commercials and those kinds of things. For
e-comm, there was certainly a hyper-focus, and I’m sure they’re very happy that they did that because I think
that they were more prepared than some other brands in terms of anticipating some of the website traffic that
they got during COVID, making sure that they were up and running operationally. I think that there was a big
focus on trying to create the website in a way that you could demo on it as best you can so that they had
Private and confidential 7
modular blocks that you could manually move around to put your couch together, so that they had visuals and
videos really showing what the true functionality of the couch was. They had to make it easier on the web to
build your own couch, be able to pick your, whether it was a down fill or whether it was a regular synthetic fill,
what kind of size you wanted.
I think that they were really hyper-focused on that and making sure that and making sure that that was
workable before COVID hit, which I think is great on the marketing side in terms of brand exposure and in
terms of driving foot traffic to the site, and in our brick-and-mortar stores. That was one person, and there was
definitely a focus on commercial. There was the thought that once people really found out about the brand,
everyone was super-passionate about the product, it would take off because it was so unique, and it was such a
great product. People had to know who the brand was, and I think partially, that was the focus on building
more stores, but then that was a big focus, also, on the commercials and getting some ads out that way.
[00:19:32]
Q: Could you outline Lovesac’s product offerings, including the number of SKUs it has? It seems slightly
limited in scope, but the company is experiencing strong growth and demand in many categories. How do you
think it considers opportunities to innovate beyond the traditional Sactional products? Do you think it could
innovate elsewhere or is it stuck to this core product that is driving growth and leveraging volume?
KD: I don’t think that they have any interest, really, in expanding outside of their core product. Back in the
day before people really knew who the brand was, they had all kinds of tchotchkes in their showrooms. They
sold lots of décor items, things from wooden birdcages to games, lots of pillows, lots of faux blankets. While I
was there certainly, they were still stuck with product that was 5-6 years old, and I think that really, the big
brand strategy and the aha moment was realising that no, they can’t compete with a brand like Pottery Barn.
They can’t compete with these other companies who sell all of these different things, but they don’t want to. It
was a focus or refocus on what they did really well and what product they sold, and the passion and the belief
in how great that was, and how important, and how unique it was, and being able to focus on those two items
and take the company focus from being in a frenzy all over the place to focusing on those two things. They do
have a small throw pillow line and, potentially, a small blanket line, although I think that that’s gotten a
vertical now, but they have those two lines, but the only reason why they have them is to dress up, really, the
couch.
The thought is that anything that’s built and anything that’s put into the funnel are things to support the
couch. You’re not going to get, ever, a barware set or plates or vases or anything else in terms of home décor.
It’s my understanding that really the focus is going to be something that enhances a couch or enhances a Sac,
and that’s going to be it. You may see things come out, but they’re not going to be ever in a place where they’re
having a wide assortment like some of these other competitors.
[00:22:02]
Q: How do you think Lovesac considers its geographical footprint for showrooms, which currently spans 35
states? How might it approach a new area, whether densely populated or rural?
KD: I think that they believe that it’s important for them to be everywhere. They’re not walking away from
small towns in Wisconsin in order to concentrate on a bigger place like San Francisco. Some of the things in
terms of their couch that you should also be thinking about is that they want to be in large homes so that
you’re buying big Sactionals. We have a New York City location, or Lovesac has a New York City location, for
example, down on maybe 10th Street or something, and the purchases are smaller because they’re purchasing
smaller couches to fit in apartments. Yes, you need those big cities, of course, for the exposure but it’s almost
equally as important that they are in areas that are potentially a little bit more suburban, because that’s really
who their client is, and being able to sell these larger configurations. I think that’s why you do see them
opening up so many stores. It’s important for them to be everywhere in order to sell through the brick-and-
Private and confidential 8
mortar, in order to get exposure, and also to have a location where a client can come or a customer can come
and really try out that couch and get the demo.
[00:23:44]
Q: Are there challenges with entering more rural areas, such as around price point? Could you suggest some
trends around Lovesac’s ability to continue to keep prices at a more premium area?
KD: Yes, the price point is certainly, it certainly feels for a first-time purchaser, for a couch, really high and
you will see, even on Facebook and some of these forums, furniture forums or home forums, a lot of people
complaining about the price, but I don’t think that Lovesac has any interest in working on decreasing those
prices until or unless there would be an issue with sales. Yes, you see the people complaining, but that’s a
demographic that’s going to play in another space anyway. They’re going to buy an Ikea couch, and they’re not
necessarily going to buy a couch from a Lovesac competitor, and there are people who are shopping different
home stores. I think competitively, Lovesac is in a good price range. I used to do tons of comp shopping and
price resistency while I was there, and I think that for their Sacs, perhaps they’re starting to reach a ceiling, but
in terms of their Sactionals, I think that they’re appropriately priced, especially once they can convince the
customer of the quality and, really, the lifetime promise of these couches. I think a customer who is going to be
out there and who is going to be spending in their competitors will have no problem paying for a Lovesac
couch, and I think that they’ve seen that and that’s part of their success.
[00:25:30]
Q: It seems in-house financing and assistance with financing a purchase is a big draw for consumers. Could
you give an overview of that dynamic? How much does it impact purchases?
KD: I believe when I was there, they were working with Synchrony and they are, it’s very important, but it’s
also important to give people the option to make large purchases, but it’s also some place where you have to be
really sensitive, because those rates can be really, really high. You have to be careful, and you’ll see that in any
of these big furniture companies who have their own private cards. You have to be really careful about how
they’re participating with the other promotions you have running, and you have to be able to communicate to
a customer why there’s that promotion or why this low interest rate or several weeks to pay down is as
important or as good as a promo where you get a percentage off. When I was there, something that I was really
responsible for was making sure that there were comparable tiers, so you could do a this or that. You could do,
say, for example, 30% off or 48 months’ financing and being able to give people the option and really arm the
store staff in particular with all the information and resources they needed to be able to communicate that to a
customer. It was important. It may not be there. It has been their favourite vehicle of choice in terms of
payments because of the high rates that were attached to them, but it was really important to be able to give
that to customers as an option, so much that they also have a tool that’s like a backup credit tool, where if a
customer doesn’t get that first credit card, they’ll be able to get a backup for a higher entrance rate.
[00:27:31]
Q: Could you highlight some of the key factors pressuring Lovesac’s margins? The company seems to benefit
from a very healthy margin profile. How do you think it achieves that?
KD: Frankly I ended up leaving my role because they started to scale back on a lot of the seasonal elements
that I did help to build when I was first there, and they started to really focus just on the couches and on the
Sac while I was there, and my role really turned into more of a margin crunching on a daily basis role, which I
was not super-interested in. Margin was a huge point of differentiation for them, as you said, vs other
furniture retailers, something that was super-important as the company went public, and super-important to
Private and confidential 9
their profitability. It’s something that was looked at. In my past lives, it would be something that we really
managed on a quarterly basis. If sales were really bad, you would start to crunch a little bit, but this was really
a weekly day-in and day-out conversation. We could change promos at the last minute or can see drivers over
the weekend, and it was all tied to how the margin was laying out, so it was something that was really watched
and really reported on, and it seems on the surface like Lovesac only has two products, but there are so many
different ways that you could manipulate their products to yield a higher margin. For example, the covers go
anywhere from a very basic stock option that we have that has a really high margin to a much lower margin, a
custom cover option.
Maybe you didn’t market and you didn’t promote the custom covers as much as you would this stock cover,
and you would give a really high discount on that stock cover because you knew you could yield lots of volume
in that and still maintain a healthy margin because that’s how the fabric was, and most of those high-margin
things could be coming out of China, or you could do a product penetration model where you really focused on
selling Sacs for a little bit vs Sactionals, because Sacs I would imagine definitely drove a higher margin. There
were lots of different levers that you could pull for a weekly promotion if you saw margins dropping a little bit
due to a flash sale or due to who knows what market activities out there, something that was being advertised
that you really didn’t want to be because it was a low margin. Again, it was something that they just really
played with and really focused on.
[00:30:06]
Q: Have you ever noticed pressure from the supply chain or aspects that can’t normally be taken into account
such as freight costs? How much variability or flexibility is there to manage margins when lowering pricing to
drive volume?
KD: I didn’t really work too much on the supply chain side, so I didn’t have a full understanding of the
variables there and how that would have been affected. I do know that whatever it was would have been
reacted to really quickly and would have been checked. I know that they were open to changing freight
carriers. I know that shipping was something that was very closely looked at, and what those shipping costs
were. I think before the company became bigger and before they hired new leadership, so I’m talking maybe
five or six years ago, a lot of these things I think didn’t get the due attention that they needed, but certainly
with the new leadership that came in right before I did, it was a high focus. Everyone was looking at it. It was a
variable that they would look at and they would react to very quickly. Even for myself, I had to combine credit
card fees into my margins to make sure that was all working together, so I’m sure it was something very visible
to senior leadership.
[00:31:34]
Q: What differentiates Lovesac’s showroom model, considering the company’s hyper-focus in this channel?
How does that compare to competitors in home furnishing?
KD: I think that the showroom model, and it was rebranded while I was there, so I participated in that, it feels
very different. I think, again, along the lines of the company really wanting to focus on their two main product
items, there was this idea that was tossed around of wanting our showroom to be like a Tesla showroom, or
wanting our showrooms to be like a Peloton showroom. You walk in, you have one Sactional, you have one
Sac, and then around it it’s really lots of supporting marketing, or for the customer to walk around, for the
customer to absorb and read so that they understand the functionality, which is the key niche point of both of
our products, and so that they understand how you can build it. There was lots of push and pull from me from
a merchandising perspective saying, “I get it, this is a really cool couch, it can be really tech-forward, but it still
lives in people’s living rooms, it still has a touch of home décor, it’s still something that’s important not just
that it works and it’s really cool, but it’s a beautiful couch and that it’s inviting and that it’s warm. There were
lots of pushes and pulls and lots of conversations, and I think you can see a little bit of that in remnants still in
our showroom. If I look at our showroom right now, it looks exactly like it did two years ago.
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The aesthetics are the same, the covers are really the same, a margin (inaudible 33.16), but it started to look
different from our competitors, and that our other competitors were really dressed up. All we had dressing up
our furniture were a few throw pillows and some blankets, and they did already start to develop lots of
marketing on the walls in order to support that, so a scale-down in terms of the aesthetics and definitely
bumped up in terms of the marketing.
[00:33:43]
Q: Could you outline some of the other touchpoints in Lovesac’s overall channel strategy? How did
partnerships such as Best Buy and Costco play into it?
KD: Yes, so for channels, you had the brick and mortar stores, you had the web, and as you mentioned you
had the Best Buy, which I don’t think that they have anymore, but you had Best Buy, you had Costco, and it
was a Macy’s shop-in-shop at some point while I was there. It was great. I remember Costco was a really
strong part of the business, and that’s public knowledge, and it was great in terms of driving awareness, in
terms of turning retail dollars, but as you can imagine, a wholesale business is not as healthy from a margin
perspective as some of the other businesses. Also, the demo for Lovesac is so important in terms of a sale and
so important in terms of brand awareness, that some of these shop-in-shops had their own staff, and despite
training’s best efforts, it was impossible to control that experience.
Definitely during our store walk-throughs or market visits we would always visit one of these other
touchpoints, and you could see just the degradation in terms of the customer experience and the customer
really not understanding what the functionality was of these couches. That was tied to a lower margin
experience, so even though there was some brand awareness, there were lots of pros and cons to those
experiences. In terms of where you really wanted to push it, you loved the showrooms in terms of our
customer experience, you loved the website and had to make it very transactional, and from a brand awareness
experience, those third-party wholesalers ended up being important to get exposure out there, but there were
lots of intricacies that had to be weighed into that to make it worth Lovesac’s while.
[00:35:45]
Q: How would you assess Lovesac’s design efforts? The company is collaborating with Prophet NYC on every
branding effort. Could you discuss the branding efforts in stores and the wholesale approach with third
parties?
KD: Yes, so I attended some of those meetings, and you can already see that impact in stores and on the web. I
think that it was more of a tech-conscious effort, and same old song that I’ve been singing just about making
sure that the technology aspect was incorporated, the website, having that experience on the website to really
show the modularity of what the furniture looked like. For example, now if you were to go into a showroom,
there’s a table with blocks of our couches so that you can put it together, so there was just a huge focus on
being able to communicate to the customer how important this was and how the brand was different.
Marketing on the walls, so that was brand new, there’s a brand new experiencing station, kind of like a Build-
A-Bear concept, but for the couches. These are your different fill options, these are your different side options,
these are your different popular options for your couches, and you can see a lot of that profit signature all over
the walls and how to put it together without necessarily needing the demo, although that was certainly
important.
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[00:37:42]
Q: Could you discuss some of Lovesac’s biggest or most prominent customers? Who is the company trying to
win market share from? Where does it identify the most risk?
KD: I think the head of marketing used to be obsessed with Pottery Barn, so that’s why I keep bringing them
up as a competitor, and certainly from a price-point perspective that was a big competitor. So definitely I think
that they see Pottery Barn as a huge competitor. They saw Restoration Hardware as a huge competitor. From a
price-point perspective it was Crate and Barrel. They didn’t really see Ashley Furniture or any of those other
more traditional brands as their competitors, because they don’t see their customer as a traditional customer. I
remember at first doing some focus groups and sitting on some of that and the feedback really being that these
were the couches that people were putting in their family rooms, these are great, durable couches that could
get dirty, that could have their pets on it, that could have these kind of things, and with the more higher-end
couches, it wasn’t the same conversation. I think that one of the biggest weaknesses in terms of Lovesac’s
strategy is that they’re not allowing room for the aesthetic piece of the couches. Like I said, they look exactly
the same as two years ago, and yes, you can have this couch for a lifetime, but does that mean you want a
couch that looks the same for a lifetime? I think that there needs to be more of a focus, and again, this is from
a merchandising perspective, but I think that there needs to be more of a focus outside of just being able to
change your covers on how you can update that couch so that it feels different. There are some options where
you can take some of those sides and turn them into roll-ons vs the square sides.
I think that that’s a good direction to move in, but perhaps not aggressive enough, changing the seat on your
couches, creating covers that have some tufting on them or maybe making faux leather a little bit more
accessible or promoting it more, which they wouldn’t because of margin reasons. I think that there’s a little bit
of tunnel vision in terms of the profitability aspect and not in terms of the longevity and how you need to
create a couch that can truly live for a lifetime and how important trends really are in the home industry as
well.
[00:40:40]
Q: Can you suggest Lovesac’s approach to opportunities outside of the US?
KD: Yes, especially from a social media perspective, so our social media person who I worked with for all
those years, at the same time that I left actually, left to go to California to become Logan Paul’s right-hand
man. He’s on the podcast with him, and whoever’s not familiar with Logan Paul, he’s a very big influencer. I
think due to that influencer attention that we’re getting at the moment, there was tons and tons and tons of
interest from overseas, specifically London, the UK, you had some Asian interest as well, and really the focus
was on the Sacs business. That’s the younger, more influencer trend than the Sactionals, which would be fine
with Lovesac because, again, the margins could be really healthy on those pieces, so there was lots of interest
there, and it was just a supply chain interest, or just a supply chain issue. If they haven’t already, I would
anticipate them very soon being able to send products over to Canada, but there were just logistical things that
needed to be worked through. I’m sure as soon as those are, you’ll start to see some global behaviour and some
things first going to the UK and potentially branching out to other places.
[00:42:09]
Q: Could you outline Lovesac’s big push to target social media channels? Is it something that the broader
industry is coming to terms with or do you think Lovesac is ahead of the curve here?
KD: I think that Lovesac was able to be a little bit more playful and not so traditional in terms of their
approach, because of Sacs in particular, so even though younger people weren’t the ones who were necessarily
buying the Sacs, it was usually parents buying for college-age kids or high-school-age kids. It was an unlock
that allowed them to play in a market that some of these more traditional brands can’t unless they had a brand
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like Pottery Barn Kids or something that specifically targeted them. That was Lovesac’s version of that, and
they were able to play in that space where lots of their competitors weren’t. I remember influencers being a big
focus, but it could have just been that person’s relationship with lots of influencers, and it did bring in lots of
foot traffic, it brought in lots of people, but they weren’t necessarily qualified. I don’t see Lovesac ever running
a really intentional campaign and spending lots of money on driving to the Sacs or driving to this influencer
market, because it doesn’t necessarily drive qualified people.
Again, like I said, it’s not the younger person who has USD 1,000 to spend on Sacs, it’s them driving their
parents, and while it’s important, it’s not their key unlock. When I worked there we tried to test sales and sales
penetration between Sacs and Sactionals, by instead of using our window space to just feature Sactionals,
using our window space in a couple of locations to feature a Sac, especially during the holidays when those are
big gifting options. We didn’t see a pick-up in sales there or penetration, because although lots of people would
stop and look at it and think that this is cool, they weren’t necessarily spending the money to purchase it.
[00:44:18]
Q: Can you discuss the seasonal nature of Sacs or Sactionals sales, including any trends that might enable us
to better anticipate Lovesac’s promotional activity? Do you expect demand to stay high over H2 2021? Are we
approaching a point where large purchases will scale back, leading to increased promotional activity?
KD: The COVID effect overall has been the unanticipated variable here, and who knows what’s happening
with that? None of us really know how that’s going to pan out and how that’s going to influence business going
forward, but if we’re just talking about a seasonal perspective, in Q4 you’re going to continue to see the same
Q4 that you see in other retailers. People are there to spend money, and we certainly have a very big giftable
option in that Sac. They can go anywhere, I think, from USD 300 upwards to USD 1,600-1,800, depending
how much you want to spend and what kind of Sac experience you have. Something that was very important to
me while I was there and something I focused on was really developing products specifically for Q4, as I know
how important that is being able to have something that was the right price-point to be able to sell during that
time while still driving your margins, so developing a cover that was really, really healthy to go with your Sacs
and bundling your Sacs. Something that Lovesac did while I was there and continues to do is create these
bundles.
They also have this really cool blanket, again, something that speaks back to your couch experience, but it’s a
blanket that’s created in-house vertically that has a big fold at the bottom for your feet, they call it a Footsac, so
being able to market a Sac and a Footsac together to get a discount, or a Sac and a Footsac and maybe throw
pillows or whatever it was that we bundled in there. That’s going to continue to be a focus, and again,
developing into a product that yields a really high margin that you can sell at a really high perceived discount
during this time for Q4, that’s always going to be a focus for them.
[00:46:37]
Q: Where do you think Lovesac could innovate successfully? Sacs seem to be doing well but, as you said, their
pricing is plateauing. Where else offers opportunities to build a strong presence?
KD: I think, again, they’re not going to innovate anywhere outside of Sactionals or outside of Sacs. There’s
just so much you can do with them, and there were lots of conversations about trying to innovate there, and
there’s just really so much that you can do with a Sac. I think Sactionals is where you have the real
opportunity. There is, I believe, a huge presence or opportunity to expand into the outdoor market, so they did
have outdoor Sactionals. I don’t know if they still have them here or if they still have them live now, but the
margins I believe were just really challenging in that, so I believe that there’s an opportunity to drive a product
with a really, really great margin in outdoor, and that will be huge, just because of the way Sactionals are set
up and the way that you can separate them and stack them if it’s raining or you need to bring them inside or
move them. I think that they’re really flexible and really designed for great outdoor use, so there’s that, and I
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think that they’ve just scratched the surface in terms of technology in terms of their indoor Sactionals. There
are so many things that they can do. You can add, say, subwoofers to the sides that will speak back to a
Bluetooth capability. There are recliners that you can add to Lovesac. There are so many different things with
couches that you can do to innovate it and really make it this moment inside the home that replaces the new
kitchen table, like they tried to say. I do think that there’s opportunity moving forward, but I think that that
almost exclusively, from an innovation perspective, lives in their Sactional category.
[00:48:41]
Q: How do you think Lovesac considers new home starts and people remodelling their homes in different
areas? How important are some of these factors to Lovesac’s long-term growth?
KD: New homeowners are hugely important to incorporate into part of the strategy. I remember one thing
that they did from an advertisement perspective, this was before they started running commercials, was send
new homeowners a voucher for a free seat and a side, because there’s really nothing you can do with a free seat
and a side, you would need to buy covers to make it usable, you would need to buy at least two more sides to
turn it into a chair. It was really the anticipated discount that you would use when purchasing a full
configuration. New movers were something that were very strategically targeted and looked at and drove lots
of sales. I think with repeat customers who are making big purchases, because they’re purchasing a second
home, a vacation home somewhere, so that’s definitely being tracked and that’s a big, important chunk of their
sales.
[00:50:11]
Q: Sactional seems more of a residential or at-home product. Is there opportunity in more of the commercial
side? How does Lovesac consider that, or does is it not really exist?
KD: I think that that would be something that they would look at in more detail once their business slows
down and they have to look for different avenues to try and comp their business. They have had commercial
moments before, I think. For Sacs specifically, there was a movie theatre that had some kind of, I don’t know,
private event there and there was a big room that was outfitted in a whole bunch of Sacs and that’s how people
watched their movie. There were a couple of things that they did within that movie chain, so they had that
opportunity for couches. The way Lovesac’s office was set up, right now, they’ve gone all remote, but they were
all Sactionals. All of our seats, our chairs, were these oversized Sactional seats, and I remember they used to
have clients who would come in and look at it and potentially toy with the idea of having that in their own
office space, but, to my knowledge, it’s not something that they ever moved forward with in any significant
way. I don’t think that they’re against it. I think that they’d be open to it. Again, that’s how they outfitted their
own space, but it’s just not a focus yet.
[00:51:35]
Q: Can we revisit Lovesac’s ability to build out inventory ahead of time vs the industry, given there have been
so many supply crunches? How does the company’s playbook differ from traditional models you have
experienced?
KD: This is just me talking out loud and thinking through what it is because they did have some of these
issues, I think that resourcing in Vietnam was really important for them, but, also, they have a lot less to play
with than some of these other people. They only promised a couple of covers in stock, they only make seats
and sides, they don’t make any of these other more tertiary categories that a lot of these companies have that
gives them the opportunity to run out of. You look at, again, I’ll bring up Pottery Barn, or Resto or any of these
other big retailers and they have five or six different models of couches. We have one model of couch and there
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are some different accessories to play with, but it’s really just the hyper-focus on these specific seats and sides
and understanding what portion of the business they drive and just being able to build on that. The factories
work almost exclusively, if not totally exclusively, for Lovesac. We don’t share it with anybody else, I don’t
know or to my knowledge, but it’s just exclusively focused on this much smaller assortment.
[00:53:15]
Q: Are Lovesac’s promises around lead time and next-day shipping limited to a few colourways or SKUs,
rather than the full catalogue?
KD: I believe that that’s true. The full catalogue is over 300 covers. When I was there, I believe there were
maybe six or seven stock items or six or seven stock covers. In terms of fills or inserts, you have the regular
standard, then you have down and then you have this synthetic blend. I was going to say, it used to be some of
them used to be third party and everything is done in-house now. I’m pretty sure the standard one is probably
always going to be promised in stock, where the fill or the down fill may not be. It’s certainly not for everything
that you see in the location, but that’s very clearly called out, what you can get right away vs what you have to
wait for.
[00:54:17]
Q: What impact does stock availability have on pricing and consumer willingness to purchase? Is it usually
higher-end models that are in stock, so consumers wanting something more lower-end might lead to some
attrition? Are consumers typically patient and willing to wait for products?
KD: I think the first thing I’ll say is that consumers will absolutely wait for what they have. I think once you
get to this price point, and just in terms of competition, this is a really great thing that Lovesac is offering, but
I think that consumers, in general, and whether or not they’re willing to wait for an item, when a client is
spending USD 3,500 or more on a couch, they want exactly what they want and especially if they’re asking for
higher materials, they know that they have to wait. Any other competitor, you’re going to have to wait,
especially on some of these more custom pieces. I think it’s great that Lovesac can deliver so quickly, but I
think it’s more of a surprise and delight and customers are sometimes elated to get it more quickly, even
though sometimes they’re buying for a future home that they’re moving into. It’s usually a surprise and delight
vs something that they’re coming to expect from the brand, but what they can expect is usually the lower-
price-point pieces. Again, it’s something that they’re already not expecting some of the higher pieces to be in
there. What we’re going to have in stock are things that are not going to present a huge liability, so it’s going to
be some of the lower-cost covers and some of the standard inserts vs some of the more expensive fills. That’s
what’s going to be in stock and that’s what drives the majority of the business anyway.
[00:57:03]
NH: Kali, I think that is a great place to end the Interview. Let me close by saying thank you for your time and
input. Clients, thank you for joining Third Bridge Forum's Interview today. If anyone would like to speak with
Kali in a private call or meeting, please let your relationship manager know. Kali, thanks again.
KD: Thank you.
Transcription ends at 00:57:17 of the recorded material
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