The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and related notes appearing elsewhere in this
Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal
year ended January 31, 2021. As discussed in the section titled "Forward-Looking
Statements," the following discussion and analysis contains forward-looking
statements that involve risks and uncertainties, as well as assumptions that, if
they never materialize or prove incorrect, could cause our results to differ
materially from those expressed or implied by such forward-looking statements.
Factors that could cause or contribute to these differences include, but are not
limited to, those identified in the Forward-Looking Statements section herein
and set forth below and those discussed in the sections titled "Risk Factors"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our most recent report on Form 10-K filed with the Securities and
Exchange Commission.
We operate on a 52- or 53-week fiscal year that ends on the Sunday closest to
February 1. Each fiscal year generally is comprised of four 13-week fiscal
quarters, although in the years with 53 weeks, the fourth quarter represents a
14-week period.
Overview
We are a technology driven company that designs, manufactures and sells unique,
high quality furniture derived through our proprietary "Designed for Life"
approach which results in products that are built to last a lifetime and
designed to evolve as our customers' lives do. Our current product offering is
comprised of modular couches called Sactionals, premium foam beanbag chairs
called Sacs, and their associated home decor accessories. Innovation is at the
center of our design philosophy with all of our core products protected by a
robust portfolio of utility patents. We market and sell our products online
directly at www.lovesac.com, supported by direct-to-consumer touch-feel points
in the form of our own showrooms, which include our newly created mobile
concierge and kiosks, as well as through shop-in-shops and online pop-up-shops
with third party retailers. We believe that our ecommerce centric approach,
coupled with our ability to deliver our large, upholstered products through
express couriers, is unique to the furniture industry.
Impact of COVID-19
In March 2020, the World Health Organization declared the outbreak of COVID-19
as a global pandemic and, in the following weeks, the U.S. federal, state and
local governments issued lockdown orders and related safety measures impacting
the operations of our showrooms and consumer demand. Although there has been a
general improvement in conditions, there continues to be significant
uncertainties around the scope and severity of the pandemic, its impact on the
global economy, including supply chains, and other business disruptions that may
impact our operating results and financial condition. We continue to follow the
guidance issued by federal, state and local governments and health organizations
and have taken measures to protect the safety of our associates and customers.
While the COVID-19 pandemic led to shifts in the way in which we operated in
fiscal 2021, we continued to serve our customers through our online channels as
our products can be easily configured, shopped online and delivered quickly in a
touchless way, coupled with consumers' demand for home related products and
solutions. In fiscal 2022, our showroom sales have increased, including sales
from shop-in-shop and pop-up-shops, and our internet sales have decreased
demonstrating a customer shift back to in-store purchases. As our showrooms are
now fully reopened, we continue to experience growth as our net sales increased
$110.9 million, or 58.1%, to $302.0 million for the thirty-nine weeks ended
October 31, 2021, compared to $191.1 million for the thirty-nine weeks ended
November 1, 2020. Retail sales drove an increase of $108.8 million, or 150.0%,
to $181.3 million for the thirty-nine weeks ended October 31, 2021 compared to
$72.5 million for the thirty-nine weeks ended November 1, 2020. The increase in
retail sales over the prior year period was mainly due to the limited showroom
operations related to COVID-19 in the prior year period, which more than offset
the decrease in our internet sales (sales made directly to customers through our
ecommerce channel) of $11.6 million or 11.4% in the thirty-nine weeks ended
October 31, 2021. New customers increased by 13.7% for the thirty-nine weeks
ended October 31, 2021 as compared to 45.7% for the thirty-nine weeks ended
November 1, 2020 due to large number of new internet customers acquired related
to the Heroes campaign and the temporary closures of some showroom locations.
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Product Overview
Our products serve as a set of building blocks that can be rearranged, restyled
and re-upholstered with any new setting, mitigating constant changes in fashion
and style. They are built to last and evolve throughout a customer's life.
•Sactionals. Our Sactional product line currently represents a majority of our
net sales. We believe our Sactionals platform is unlike competing products in
its adaptability yet is comparable aesthetically to similarly priced premium
couches and sectionals. Our Sactional products include a number of patented
features relating to their geometry and modularity, coupling mechanisms and
other features. Utilizing only two, standardized pieces, "seats" and "sides,"
and approximately 200 high quality, tight-fitting covers that are removable,
washable, and changeable, customers can create numerous permutations of a
sectional couch with minimal effort. Customization is further enhanced with our
specialty-shaped modular offerings, such as our wedge seat and roll arm side.
Our custom features and accessories can be added easily and quickly to a
Sactional to meet endless design, style, storage and utility preferences,
reflecting our Designed for Life philosophy. Sactionals are built to meet the
highest durability and structural standards applicable to fixed couches.
Sactionals are comprised of standardized units and we guarantee their
compatibility over time, which we believe is a major pillar of their value
proposition to the consumer. Our Sactionals represented 86.0% and 87.3% of our
sales for the thirteen and thirty-nine weeks ended October 31, 2021 as compared
to 84.7% and 84.1% of our sales for the thirteen and thirty-nine weeks ended
November 1, 2020, respectively.

During October 2021, we introduced the new Sactionals StealthTech Sound + Charge
product line. This unique innovation features immersive surround sound by Harman
Kardon and convenient wireless charging, all seamlessly embedded and hidden
inside the adaptable Sactionals platform. The System includes two Sound + Charge
Sides each with embedded front- and rear-firing Harman Kardon speakers, a
Subwoofer that easily integrates into a Sactionals Seat Frame and a Center
Channel, all working in unison to deliver captivating surround sound that is
completely hidden from view.
•Sacs. We believe that our Sacs product line is a category leader in oversized
beanbags. The Sac product line offers 6 different sizes ranging from 22 pounds
to 95 pounds with capacity to seat 3+ people on the larger model Sacs. Filled
with Durafoam, a blend of shredded foam, Sacs provide serene comfort and
guaranteed durability. Their removable covers are machine washable and may be
easily replaced with a wide selection of cover offerings.
•Accessories. Our accessories complement our Sacs and Sactionals by increasing
their adaptability to meet evolving consumer demands and preferences. Our
current product line offers Sactional-specific drink holders, Footsac blankets,
decorative pillows, fitted seat tables and ottomans in varying styles and
finishes and our unique Sactionals Power Hub, providing our customers with the
flexibility to customize their furnishings with decorative and practical add-ons
to meet evolving style preferences.
Sales Channels
We offer our products through an omni-channel platform that provides a seamless
and meaningful experience to our customers online and in-store. Our distribution
strategy allows us to reach customers through four distinct, brand-enhancing
channels.
•Showrooms. We market and sell our products through 135 retail locations at top
tier malls, lifestyle centers, mobile concierge, kiosk, and street locations in
38 states in the U.S. We carefully select the best small-footprint retail
locations in high-end malls and lifestyle centers for our showrooms. Compared to
traditional retailers, our showrooms require significantly less square footage
because of our need to have only a few in-store sample configurations for
display and our ability to stack our inventory for immediate sale. The
architecture and layout of these showrooms is designed to communicate our brand
personality and key product features. Our goal is to educate first-time
customers, creating an environment where people can touch, feel, read, and
understand the technology behind our products. We are updating and remodeling
many of our showrooms to reflect our new showroom concept, which emphasizes our
unique product platform, and is the standard for new showrooms. Our new showroom
concept utilizes technology in more experiential ways to increase traffic and
sales. Net sales completed through this channel accounted for 59.7% and 60.0% of
total net sales for the thirteen and thirty-nine weeks ended October 31, 2021,
respectively, up from 55.6% and 37.9% of total net sales for the thirteen and
thirty-nine weeks ended November 1, 2020, respectively.
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•Ecommerce. Through our ecommerce channel, we believe we are able to
significantly enhance the consumer shopping experience for home furnishings,
driving deeper brand engagement and loyalty, while also realizing more favorable
margins than our showroom locations. We believe our robust technological
capabilities position us well to benefit from the growing consumer preference to
transact at home and via mobile devices. With furniture especially suited to
ecommerce applications, our net sales completed through this channel accounted
for 30.5% and 29.9% of total net sales for the thirteen and thirty-nine weeks
ended October 31, 2021, respectively, down from 34.4% and 53.3% of total net
sales for the thirteen and thirty-nine weeks ended November 1, 2020,
respectively.
•Other touchpoints. We augment our showrooms with other touchpoint strategies
including online pop-up-shops, shop-in-shops, and barter inventory transactions.
We utilize in store pop-up-shops to increase the number of locations where
customers can experience and purchase our products, a low-cost alternative to
drive brand awareness, in store sales, and ecommerce sales. These in-store
pop-up-shops are staffed similarly to our showrooms with associates trained to
demonstrate and sell our products and promote our brand. Unlike the in-store
pop-up-shops which are typically 10-day shows, and pop-up locations,
shop-in-shops are designed to be in permanent locations carrying the same
digital technology of our showrooms and are also staffed with associates trained
to demonstrate and sell our products. Shop-in-shops require less capital
expenditure to open a productive space to drive brand awareness and touchpoint
opportunities for demonstrating and selling our products. We did not host any
in-store pop-up-shops in the thirteen and thirty-nine weeks ended October 31,
2021. We did not host any in-store pop-up-shops in the thirteen weeks ended
November 1, 2020 and hosted 154 in store pop-up-shops at Costco for the
thirty-nine weeks ended November 1, 2020.
We operated 2 and 6 temporary online pop-up-shops on Costco.com for the thirteen
and thirty-nine weeks ended October 31, 2021, respectively, and 2 and 4 for the
thirteen and thirty-nine weeks ended November 1, 2020, respectively. We expect
to continue hosting temporary online pop-ups on Costco.com and do not currently
expect any further contribution from Costco for in-store pop-up-shops. We
operated 5 Best Buy shop-in-shops for the thirteen and thirty-nine weeks ended
October 31, 2021, respectively, up from 3 for the thirteen and thirty-nine weeks
ended November 1, 2020, respectively. Other sales which includes pop-up-shop
sales, shop-in-shop sales, and barter inventory transactions accounted for 9.8%
and 10.1% of our total sales for the thirteen and thirty-nine weeks ended
October 31, 2021, respectively, up from 10.0% and 8.7% of our total sales for
the thirteen and thirty-nine weeks ended November 1, 2020, respectively.
             SELECTED CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following tables present our summary condensed consolidated financial and
other data as of and for the periods indicated. The condensed consolidated
statement of operations data for the thirteen and thirty-nine weeks ended
October 31, 2021 and November 1, 2020, the condensed consolidated statement of
cash flow data for the thirty-nine weeks ended October 31, 2021 and November 1,
2020 and the summary condensed consolidated balance sheet data as of October 31,
2021, are derived from our unaudited condensed consolidated financial statements
included elsewhere in this Quarterly Report filed on Form 10-Q and have been
prepared on the same basis as the audited condensed consolidated financial
statements.
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The summarized financial information presented below is derived from and should
be read in conjunction with our audited condensed consolidated financial
statements including the notes to those financial statements and our unaudited
condensed consolidated financial statements including the notes to those
financial statements both of which are included elsewhere in is Quarterly Report
filed on Form 10-Q along with the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Our historical
results are not necessarily indicative of our future results.
                                                           Thirteen weeks ended                           Thirty-nine weeks ended
(amounts in thousands, except per share             October 31,             November 1,              October 31,              November 1,
data and share amounts)                                 2021                   2020                     2021                     2020
Condensed Consolidated Statement of
Operations Data:
Net sales
Showrooms                                        $     69,694             $     41,538          $     181,274               $     72,507
Internet                                               35,542                   25,710                 90,198                    101,848
Other                                                  11,442                    7,494                 30,569                     16,705
Total net sales                                       116,678                   74,742                302,041                    191,060

Cost of merchandise sold                               58,062                   33,434                138,317                     91,413

Gross profit                                           58,616                   41,308                163,724                     99,647
Operating expenses
Selling, general and administrative
expenses                                               38,087                   25,945                104,191                     75,160
Advertising and marketing                              15,832                   10,975                 39,548                     26,337
Depreciation and amortization                           1,726                    1,854                  5,748                      5,034

Total operating expenses                               55,645                   38,774                149,487                    106,531

Operating income (loss)                                 2,971                    2,534                 14,237                     (6,884)

Interest expense, net                                     (45)                     (44)                  (135)                       (22)

Net income (loss) before taxes                          2,926                    2,490                 14,102                     (6,906)

Provision for income taxes                               (174)                     (11)                  (842)                       (70)

Net income (loss)                                $      2,752             $      2,479          $      13,260               $     (6,976)
Net Income (Loss) Attributable to Common
Stockholders                                     $      2,752             $      2,479          $      13,260               $     (6,976)

Net income (loss) per common share:
Basic (1)                                        $       0.18             $       0.17          $        0.88               $      (0.48)
Diluted (1)                                      $       0.17             $       0.16          $        0.83               $      (0.48)

Weighted average number of common shares
outstanding:
Basic                                              15,146,890               14,561,835             15,092,844                 14,520,282
Diluted                                            16,069,729               15,581,487             16,015,683                 14,520,282


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                                                                 Thirteen weeks ended                         Thirty-nine weeks ended
                                                           October 31,             November 1,           October 31,            November 1,
(dollars in thousands)                                        2021                    2020                   2021                  2020

EBITDA (2)(3)                                          $     4,697               $      4,388          $      19,985          $     (1,851)
Adjusted EBITDA (2)(3)                                 $     5,818               $      5,954          $      23,553          $      2,437


                                             As of
                                 October 31,       January 31,
(amounts in thousands)               2021              2021

Balance Sheet Data:
Cash and cash equivalents       $     47,862      $     78,341
Working capital                       82,043            87,075
Total assets                         292,833           171,019
Total liabilities                    172,236            63,073
Total stockholders' equity           120,597           107,946


                                                                            Thirty-nine weeks ended
                                                                                              November 1,
(amounts in thousands)                                               October 31, 2021             2020

Condensed Consolidated Statement of Cash flow Data: Net Cash (Used in) Provided by Operating Activities

$      (15,179)         $     6,929
Net Cash Used in Investing Activities                                       (11,841)              (7,168)
Net Cash Used in Financing Activities                                        (3,459)                (614)
Net change in cash and cash equivalents                                     (30,479)                (853)
Cash and cash equivalents at the end of the period                           47,862               47,686


(1)For the calculation of basic and diluted net income (loss) per share, see
Note 5 and Note 8 to our condensed consolidated financial statements.
(2)EBITDA and Adjusted EBITDA are "Non-GAAP Measures" that are supplemental
measures of financial performance that are not required by, or presented in
accordance with, GAAP. We believe that EBITDA and Adjusted EBITDA are useful
measures of operating performance, as they eliminate expenses that are not
reflective of the underlying business performance, facilitate a comparison of
our operating performance on a consistent basis from period-to-period and
provide for a more complete understanding of factors and trends affecting our
business. Additionally, EBITDA is frequently used by analysts, investors and
other interested parties to evaluate companies in our industry. We use EBITDA
and Adjusted EBITDA, alongside GAAP measures such as gross profit, operating
income (loss) and net income (loss), to measure and evaluate our operating
performance and we believe these measures are useful to investors in evaluating
our operating performance.
These Non-GAAP Measures should not be considered as alternatives to net income
(loss) or net income (loss) per share as a measure of financial performance,
cash flows from operating activities as a measure of liquidity, or any other
performance measure derived in accordance with GAAP. They should not be
construed as an inference that our future results will be unaffected by unusual
or non-recurring items. Additionally, our Non-GAAP Measures are not intended to
be measures of free cash flow for management's discretionary use, as they do not
consider certain cash requirements such as tax payments and debt service
requirements and certain other cash costs that recur in the future. Our Non-GAAP
Measures contain certain other limitations, including the failure to reflect our
cash expenditures, cash requirements for working capital needs and cash costs to
replace assets being depreciated and amortized. In addition, our Non-GAAP
Measures exclude certain non-recurring and other charges.
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In the future, we may incur expenses that are the same as or similar to some of
the adjustments in our Non-GAAP Measures. Our presentation of our Non-GAAP
Measures should not be construed to imply that our future results will be
unaffected by any such adjustments. Management compensates for these limitations
by relying primarily on our GAAP results and by using our Non-GAAP Measures as
supplemental information. Our Non-GAAP Measures are not necessarily comparable
to other similarly titled captions of other companies due to different methods
of calculation.
(3)We define "EBITDA" as earnings before interest, taxes, depreciation and
amortization. We define "Adjusted EBITDA" as EBITDA adjusted for the impact of
certain non-cash and other items that we do not consider in our evaluation of
ongoing operating performance. These items include management fees, equity-based
compensation expense, write-offs of property and equipment, deferred rent,
financing expenses and certain other charges and gains that we do not believe
reflect our underlying business performance.
Reconciliation of Non-GAAP Financial Measures
The following provides a reconciliation of Net income (loss) to EBITDA and
Adjusted EBITDA for the periods presented:
                                                 Thirteen weeks

Thirteen weeks Thirty-nine weeks Thirty-nine weeks


                                                ended October 31,       ended November 1,       ended October 31,        ended November 1,
(amounts in thousands)                                2021                    2020                     2021                     2020
Net income (loss)                               $        2,752          $        2,479          $        13,260          $        (6,976)
Interest expense, net                                       45                      44                      135                       22
Taxes                                                      174                      11                      842                       70
Depreciation and amortization                            1,726                   1,854                    5,748                    5,034
EBITDA                                                   4,697                   4,388                   19,985                   (1,851)
Management fees (a)                                          -                     125                        -                      375
Deferred rent (b)                                            -                     378                        -                    1,234
Equity-based compensation (c)                            1,121                   1,063                    3,014                    2,638
Loss on disposal of property and
equipment (d)                                                -                       -                        -                        5
Impairment of right of use lease asset
(e)                                                          -                       -                      554                        -
Other non-recurring expenses (f)(g)                          -                       -                        -                       36
Adjusted EBITDA                                 $        5,818          $        5,954          $        23,553          $         2,437


(a)Represents management fees and expenses charged by our equity sponsors.
(b)Represents the difference between rent expense recorded and the amount paid
by the Company. In accordance with generally accepted accounting principles, the
Company records monthly rent expense equal to the total of the payments due over
the lease term, divided by the number of months of the lease terms. The Company
adopted ASC 842 at the beginning of fiscal 2022 therefore we no longer recognize
deferred rent.
(c)Represents expenses, such as compensation expense and employer taxes related
to RSU equity vesting and exercises associated with stock options and restricted
stock units granted to our associates and board of directors.
(d)Represents the loss on disposal of fixed assets related to showroom remodels.
(e)Represents the impairment of the right of use lease asset for one showroom
for which the fixed assets had been impaired in the prior fiscal quarter.
(f)There were no other non-recurring expenses in the thirteen weeks ended
October 31, 2021 and November 1, 2020, respectively.
(g)There were no other non-recurring expenses in the thirty-nine weeks ended
October 31, 2021. Other non-recurring expenses in the thirty-nine weeks ended
November 1, 2020 are related to professional and legal fees related to financing
initiatives.
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How We Assess the Performance of Our Business
We consider a variety of financial and operating measures, including the
following, to evaluate our business, measure our performance, identify trends
affecting our business, formulate business plans, and make strategic decisions.
Net Sales
Net sales reflect our sale of merchandise plus shipping and handling revenue
less returns and discounts. Sales made at Company operated showrooms, including
shop-in-shops and pop-up shops, and via the web are recognized in accordance
with the guidance set forth in ASC 606, which is typically at the point of
transference of title when the goods are shipped.
Gross Profit
Gross profit is equal to our net sales less cost of merchandise sold. Gross
profit as a percentage of our net sales is referred to as gross margin. In
September 2018, the Office of the U.S. Trade Representative began imposing a 10
percent ad valorem duty on a subset of products imported from China, inclusive
of various furniture product categories. In September 2019, the Office of U.S.
Trade Representative imposed an additional 15 percent ad valorem duty on
products imported from China.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include all operating costs, other
than advertising and marketing expense, not included in cost of merchandise
sold. These expenses include all payroll and payroll-related expenses; showroom
expenses, including occupancy costs related to showroom operations, such as rent
and common area maintenance; occupancy and expenses related to many of our
operations at our headquarters, including utilities, equity-based compensation,
financing related expense and public company expenses. Selling, general and
administrative expenses as a percentage of net sales is usually higher in lower
volume quarters and lower in higher volume quarters because a significant
portion of the costs are relatively fixed.
Our recent revenue growth has been accompanied by increased selling, general and
administrative expenses. The most significant components of these increases are
payroll and rent costs. We expect these expenses, as well as rent expense
associated with the opening of new showrooms, to increase as we grow our
business. We expect to leverage total selling, general and administrative
expenses as a percentage of sales as sales volumes continue to grow. We expect
to continue to invest in infrastructure to support the Company's growth. These
investments will lessen the impact of expense leveraging during the period of
investment with the greater impact of expense leveraging happening after the
period of investment. However, total selling, general and administrative
expenses generally will leverage during the periods of investments with the most
deleverage occurring in the first three quarters of the fiscal year, and the
greatest leverage occurring in the fourth quarter.
Advertising and Marketing Expense
Advertising and marketing expense include digital, social, and traditional
advertising and marketing initiatives that cover all of our business channels.
Advertising and marketing expense is expected to continue to increase as a
percentage to sales as we continue to invest in advertising and marketing which
has accelerated sales growth.
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Basis of Presentation and Results of Operations
The following table sets forth, for the periods presented, our condensed
consolidated statement of operations data as a percentage of total revenues:
                                                         Thirteen weeks ended                              Thirty-nine weeks ended
                                                October 31,              November 1,                October 31,               November 1,
                                                    2021                     2020                      2021                       2020

Statement of Operations Data:
Net sales                                               100  %                     100  %                    100  %                     100  %
Cost of merchandise sold                                 50  %                      45  %                     46  %                      48  %
Gross profit                                             50  %                      55  %                     54  %                      52  %
Selling, general and administrative expenses             33  %                      35  %                     34  %                      39  %
Advertising and marketing                                14  %                      15  %                     13  %                      14  %
Depreciation and amortization                             1  %                       2  %                      2  %                       3  %
Operating income (loss)                                   2  %                       3  %                      5  %                      -4  %
Interest expense, net                                     0  %                       0  %                      0  %                       0  %
Net income (loss) before taxes                            2  %                       3  %                      5  %                      -4  %
Provision for income taxes                                0  %                       0  %                      0  %                       0  %
Net income (loss)                                         2  %                       3  %                      5  %                      -4  %


Thirteen weeks ended October 31, 2021 Compared to the Thirteen weeks ended
November 1, 2020
Net sales
Net sales increased $42.0 million, or 56.1%, to $116.7 million in the thirteen
weeks ended October 31, 2021 as compared to $74.7 million in the thirteen weeks
ended November 1, 2020. The increase in overall net sales was driven by growth
across all channels. New customers increased by 21.7% in the thirteen weeks
ended October 31, 2021 as compared to 34.0% in the thirteen weeks ended
November 1, 2020 driven by higher new customers acquisition in our Internet
channel in our prior year period. We had 135 and 107 total showrooms as of
October 31, 2021 and November 1, 2020, respectively. We opened 9 additional
showrooms, 2 mobile concierges, 1 kiosk, and remodeled 1 showroom and did not
close any showrooms in the thirteen weeks ended October 31, 2021, as compared to
opening 10 and not closing or remodeling any showrooms in the thirteen weeks
ended November 1, 2020. Showroom sales increased $28.2 million, or 67.8%, to
$69.7 million in the thirteen weeks ended October 31, 2021 as compared to
$41.5 million in the thirteen weeks ended November 1, 2020. This increase was
due in large part to comparable sales increase of $19.5 million, or 53.3%, to
$56.1 million in the thirteen weeks ended October 31, 2021, compared to
$36.6 million in the thirteen weeks ended November 1, 2020, related to higher
point of sales transactions with lower promotional discounting and the addition
of 28 new showrooms. Point of sales transactions represent orders placed through
our showrooms which does not always reflect the point at which control transfers
to the customer, which occurs upon shipment being confirmed. See Note 12 to the
condensed consolidated financial statements. We believe point of sales
transactions is a more accurate way to measure showroom performance and how our
showroom associates are incentivized. Retail sales per selling square foot
increased $82, or 17.0%, to $564 in the thirteen weeks ended October 31, 2021 as
compared to $482 in the thirteen weeks ended November 1, 2020. Total number of
units sold at point of transaction increased by approximately 21.4% driven by
higher comparable sales. The increase in comparable sales, retail sales per
selling square foot and total number of units sold over prior years is the
result of a very strong Labor Day campaign. Internet sales (sales made directly
to customers through our ecommerce channel) increased $9.8 million, or 38.2%, to
$35.5 million in the thirteen weeks ended October 31, 2021 as compared to
$25.7 million in the thirteen weeks ended November 1, 2020 also driven by very
strong Labor Day campaign. Other sales, which include pop-up-shop sales,
shop-in-shop sales, and barter inventory transactions increased $3.9 million, or
52.7%, to $11.4 million in the thirteen weeks ended October 31, 2021 as compared
to $7.5 million in the thirteen weeks ended November 1, 2020. This increase was
principally due to higher productivity of our temporary online pop-up-shop on
Costco.com compared to the prior year period.
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Gross profit
Gross profit increased $17.3 million, or 41.9%, to $58.6 million in the thirteen
weeks ended October 31, 2021 from $41.3 million in the thirteen weeks ended
November 1, 2020. Gross margin decreased to 50.2% of net sales in the thirteen
weeks ended October 31, 2021 from 55.3% of net sales in the thirteen weeks ended
November 1, 2020. The decrease in gross margin percentage of 510 basis points
was primarily driven by an increase of approximately 748 basis points in total
distribution and related tariff expenses partially offset by an improvement of
238 basis points in product margin. The increase in total distribution and
related tariff expenses over prior year is principally related to the negative
impact of 953 basis points increase in inbound transportation cost and increased
tariff related to higher product sourcing from China, partially offset by 205
basis points improvements due to higher leverage of warehousing and outbound
freight costs. The product margin rate improvement is due to lower promotional
discounting and continuing vendor negotiations to assist with the mitigation of
tariffs.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $12.2 million, or 46.8%,
to $38.1 million in the thirteen weeks ended October 31, 2021 as compared to
$25.9 million in the prior year period. The increase in selling, general and
administrative expenses was primarily related to an increase in employment
costs, rent, overhead expenses, and selling related expenses. Employment costs
increased by $6.4 million driven by an increase in new hires and variable
compensation. Rent increased by $2.7 million related to $1.5 million rent
expense from our net addition of 28 showrooms and $1.2 million in higher
percentage rent from the increase in sales. Overhead expenses increased $1.6
million consisting of an increase of $1.3 million in infrastructure investments,
an increase of $0.2 million in travel expenses, and an increase of $0.1 million
in equity-based compensation. Selling related expenses increased $1.5 million
principally due to credit card fees related to the increase in sales.
Selling, general and administrative expenses were 32.6% of net sales in the
thirteen weeks ended October 31, 2021 as compared to 34.7% of net sales in the
thirteen weeks ended November 1, 2020. The decrease in selling, general and
administrative expenses of 207 basis points was primarily due to higher leverage
within infrastructure investments, equity-based compensation, insurance, rent,
and selling related expenses, partially offset by deleverage in employment costs
and travel. The deleverage in certain expenses relate to the investments we are
making into the business that were put on hold in the prior year relating to
COVID-19 financial resilience measures.
Advertising and Marketing
Advertising and marketing expenses increased $4.8 million, or 44.3%, to
$15.8 million for the thirteen weeks ended October 31, 2021 as compared to
$11.0 million in the thirteen weeks ended November 1, 2020. The majority of the
increase in advertising and marketing dollars relates to the ongoing investments
in marketing spends to support our sales growth. The investment by quarter may
vary greatly. Advertising and marketing expenses were 13.6% of net sales in the
thirteen weeks ended October 31, 2021 as compared to 14.7% of net sales in the
thirteen weeks ended November 1, 2020. The majority of the decrease in
advertising and marketing as a percent of net sales is primarily due to improved
performance in our media activities which has driven an increase in net sales at
lower promotional discounting.
Depreciation and amortization expenses
Depreciation and amortization expenses decreased $0.2 million , or 6.9%, to
$1.7 million in the thirteen weeks ended October 31, 2021 as compared to
$1.9 million in the thirteen weeks ended November 1, 2020. The decrease in
depreciation and amortization expense principally relates to capital investments
for new and remodeled showrooms.
Interest (expense) income, net
Interest expense, net which is less than $0.1 million for the thirteen weeks
ended October 31, 2021 and November 1, 2020, principally relates to the interest
expense related to unused line fees and amortization of deferred financing fees
on the asset-based loan with a slight offset of interest earned on the Company's
cash and cash equivalents balances.
Provision for income taxes
Income tax provision was less than 0.15% and 0.01% of sales for the thirteen
weeks ended October 31, 2021 and November 1, 2020, respectively.
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Thirty-nine weeks ended October 31, 2021 Compared to the Thirty-nine weeks ended
November 1, 2020
Net sales
Net sales increased $110.9 million, or 58.1%, to $302.0 million in the
thirty-nine weeks ended October 31, 2021 as compared to $191.1 million in the
thirty-nine weeks ended November 1, 2020. The increase in overall net sales was
driven by our Showroom sales, Other sales and partially offset by a decrease in
our Internet Sales. New customers increased by 13.7% in the thirty-nine weeks
ended October 31, 2021 as compared to 45.7% in the thirty-nine weeks ended
November 1, 2020 driven by the successful Internet Heroes' campaign in the prior
year period. We had 135 and 107 total showrooms as of October 31, 2021 and
November 1, 2020, respectively. We opened 25 additional showrooms, 2 mobile
concierges, 1 kiosk, and remodeled 1 showroom and did not close any in the
thirty-nine weeks ended October 31, 2021, as compared to opening 18 additional
showrooms, permanently closing 2 showrooms and remodeling 0 showroom in the
thirty-nine weeks ended November 1, 2020. Showroom sales increased $108.8
million, or 150.0%, to $181.3 million in the thirty-nine weeks ended October 31,
2021 as compared to $72.5 million in the thirty-nine weeks ended November 1,
2020, related to higher point of sales transactions driven by limited showroom
operations due to COVID-19 in the prior year period and lower promotional
discounting. This increase was due in large part to our comparable showroom
point of sales transaction increase of $86.5 million, or 133.0%, to
$151.5 million in the thirty-nine weeks ended October 31, 2021 as compared to
$65.0 million in the thirty-nine weeks ended November 1, 2020. Point of sales
transactions represent orders placed through our showrooms which does not always
reflect the point at which control transfers to the customer, which occurs upon
shipment being confirmed. See Note 12 to the condensed consolidated financial
statements. We believe point of sales transactions is a more accurate way to
measure showroom performance and how our showroom associates are incentivized.
Retail sales per selling square foot increased $795, or 88.1%, to $1,697 in the
thirty-nine weeks ended October 31, 2021 as compared to $902 in the thirty-nine
weeks ended November 1, 2020. Total number of units sold at point of transaction
increased by approximately 88.3%. The increase in comparable point of sales
transactions, retail sales per selling square foot and number of units sold for
the thirty-nine weeks ended was principally driven by the limited showroom
operations due to COVID-19 in the prior year period. Other sales, which include
pop-up-shop sales, shop-in-shop sales, and barter inventory transactions,
increased $13.9 million, or 83.0%, to $30.6 million in the thirty-nine weeks
ended October 31, 2021 as compared to $16.7 million in the thirty-nine weeks
ended November 1, 2020. This increase was due to hosting 2 additional temporary
online pop-up-shops on Costco.com with higher productivity compared to the prior
year period, partially offset by sales decrease from shop-in-shop locations
related to Macy's closures. Internet sales (sales made directly to customers
through our ecommerce channel) decreased $11.6 million, or 11.4%, to
$90.2 million in the thirty-nine weeks ended October 31, 2021 as compared to
$101.8 million in the thirty-nine weeks ended November 1, 2020. The decrease in
Internet sales was due primarily to the shift of sales into the internet channel
in prior year as a result of the limited showroom operations due to COVID-19.
Gross profit
Gross profit increased $64.1 million, or 64.3%, to $163.7 million in the
thirty-nine weeks ended October 31, 2021 from $99.6 million in the thirty-nine
weeks ended November 1, 2020. Gross margin increased to 54.2% of net sales in
the thirty-nine weeks ended October 31, 2021 from 52.2% of net sales in the
thirty-nine weeks ended November 1, 2020. The increase in gross margin
percentage of 200 basis points was primarily driven by an increase of
approximately 367 basis points due to lower promotional discount and continuing
vendor negotiations to assist with the mitigation of tariffs. Distribution and
related tariff expenses increased by 167 basis points over the prior year due to
the increase in inbound freight of 822 basis points driven by escalating inbound
container costs as well as some shift of inventory sourcing back to China, which
are impacted by the 25% tariff rate to help alleviate container congestion
coming from our other overseas vendors, partially offset by higher leverage of
655 basis points in warehousing and distribution costs.
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Selling, general and administrative expenses
Selling, general and administrative expenses increased $29.0 million, or 38.6%,
to $104.2 million in the thirty-nine weeks ended October 31, 2021 as compared to
$75.2 million in thirty-nine weeks ended November 1, 2020. The increase in
selling, general and administrative expenses was primarily related to an
increase in employment costs, rent, overhead expenses, and selling related
expenses. Employment costs increased by $16.3 million driven by an increase in
new hires and variable compensation. Rent increased by $6.6 million related to
$4.1 million rent expense from our net addition of 28 showrooms and $2.5 million
in higher percentage rent from the increase in sales. Overhead expenses
increased $3.4 million consisting of an increase of $2.8 million in
infrastructure investments, an increase of $0.4 million in equity-based
compensation and an increase of $0.2 million in travel expenses. Selling related
expenses increased $2.7 million due to an increase of $4.2 million in credit
card fees, partially offset by a decrease of $1.5 million due to a lower fee
structure for online pop-up-shop sales at Costco.com.
Selling, general and administrative expenses were 34.5% of net sales in the
thirty-nine weeks ended October 31, 2021 as compared to 39.3% of net sales in
the thirty-nine weeks ended November 1, 2020. The decrease in selling, general
and administrative expenses of 484 basis points was primarily due to higher
leverage within infrastructure investments, selling related expenses, rent,
equity-based compensation and insurance, partially offset by deleverage in
employment costs and travel. The deleverage in certain expenses relate to the
investments we are making into the business that were put on hold in the prior
year relating to COVID-19 financial resilience measures.
Advertising and Marketing
Advertising and marketing expenses increased $13.2 million, or 50.2%, to
$39.5 million in the thirty-nine weeks ended October 31, 2021 as compared to
$26.3 million in the thirty-nine weeks ended November 1, 2020. The majority of
the increase in advertising and marketing dollars relates to the reinstatement
of marketing spends as showroom locations are fully open in the current period
versus the limited showroom operations due to COVID-19 in the prior year period.
The investment by quarter may vary greatly. Advertising and marketing expenses
were 13.1% of net sales in the thirty-nine weeks ended October 31, 2021 as
compared to 13.8% of net sales in the thirty-nine weeks ended November 1, 2020.
The majority of the decrease in advertising and marketing as a percent of net
sales is primarily due to improved performance in our media activities which has
driven an increase in net sales, higher Sactional sales mix and higher average
selling price.
Depreciation and amortization expenses
Depreciation and amortization expenses increased $0.7 million, or 14.2%, to
$5.7 million in the thirty-nine weeks ended October 31, 2021 as compared to
$5.0 million in the thirty-nine weeks ended November 1, 2020. The increase in
depreciation and amortization expense principally relates to capital investments
for new and remodeled showrooms.
Interest income (expense), net
Interest expense, net which is approximately $0.1 million relates to the
interest expense related to unused line fees and amortization of deferred
financing fees on the asset-based loan with a slight offset of interest earned
on the Company's cash and cash equivalents balances for the thirty-nine weeks
ended October 31, 2021. The increase in net interest expense from prior year was
the result of a decrease in interest rates being earned on the Company's cash
and cash equivalents during the thirty-nine weeks ended October 31, 2021 as
compared to the same period in the prior year.
Provision for income taxes
Income tax provision was less than 0.28% and 0.04% of sales for the thirty-nine
weeks ended October 31, 2021 and November 1, 2020, respectively.
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Liquidity and Capital Resources
General
Our business relies on cash flows from operations, our revolving line of credit
(see "Revolving Line of Credit" below) and securities issuances as our primary
sources of liquidity. Our primary cash needs are for advertising and marketing,
inventory, payroll, showroom rent, capital expenditures associated with opening
new showrooms and updating existing showrooms, as well as infrastructure and
information technology. The most significant components of our working capital
are cash and cash equivalents, inventory, accounts receivable, accounts payable
and other current liabilities and customer deposits. Borrowings generally
increase in our third fiscal quarter as we prepare for the holiday selling
season, which is in our fourth fiscal quarter. We believe that cash expected to
be generated from operations, the availability under our revolving line of
credit and our existing cash balances are sufficient to meet working capital
requirements and anticipated capital expenditures for at least the next 12
months.
Cash Flow Analysis
A summary of operating, investing, and financing activities during the periods
indicated are shown in the following table:

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