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Lovesac (LOVE) Research Report: Q1 CY2024 Update


Full Report / June 13, 2024

Furniture company Lovesac (NASDAQ:LOVE) announced better-than-expected results in Q1 CY2024, with revenue down 6.1% year on year to $132.6 million. The company expects next quarter's revenue to be around $156 million, in line with analysts' estimates. It made a GAAP loss of $0.83 per share, down from its loss of $0.28 per share in the same quarter last year.

Lovesac (LOVE) Q1 CY2024 Highlights:

  • Revenue: $132.6 million vs analyst estimates of $128.1 million (3.6% beat)
  • Revenue Guidance for Q2 CY2024 is $156 million at the midpoint, roughly in line with what analysts were expecting
  • The company reconfirmed its revenue guidance for the full year of $735 million at the midpoint
  • Gross Margin (GAAP): 54.3%, up from 50% in the same quarter last year
  • Free Cash Flow was -$14.31 million, down from $49.53 million in the previous quarter
  • Market Capitalization: $402.4 million

Known for its oversized, premium beanbags, Lovesac (NASDAQ:LOVE) is a specialty furniture brand selling modular furniture.

The company started with its signature product, the "Lovesac", which is a large and durable beanbag chair. It has since expanded to offer a unique line of modular sectional couches known as Sactionals.

Lovesac's Sactionals are a distinctive product in the furniture market, offering adaptability and customization. These modular couches have sections that can be combined in various configurations to fit any room size or shape, making them a practical choice for diverse living spaces. The Sactionals' design is user-friendly, allowing for easy assembly, reconfiguration, and expansion.

Lovasac products are quite expensive: its beanbags can cost $800 and some Sactionals are upwards of $10,000. As such, the company's products appeal to customers who like experimenting with their furniture and are willing to pay up for home decor.

Home Furnishings

A healthy housing market is good for furniture demand as more consumers are buying, renting, moving, and renovating. On the other hand, periods of economic weakness or high interest rates discourage home sales and can squelch demand. In addition, home furnishing companies must contend with shifting consumer preferences such as the growing propensity to buy goods online, including big things like mattresses and sofas that were once thought to be immune from e-commerce competition.

Lovesac’s primary competitors include La-Z-Boy (NYSE:LZB), Wayfair (NYSE:W), West Elm (owned by Williams-Sonoma NYSE:WSM), and private companies IKEA and Ashley Furniture

Sales Growth

Reviewing a company's long-term performance can reveal insights into its business quality. Any business can have short-term success, but a top-tier one tends to sustain growth for years. Lovesac's sales grew at an incredible 30.9% compounded annual growth rate over the last five years. This is encouraging because it shows Lovesac's offerings resonate with customers, a helpful starting point for our assessment of quality. Lovesac Total Revenue

Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. Lovesac's recent history shows its demand slowed significantly as its annualized revenue growth of 12.7% over the last two years is well below its five-year trend.

This quarter, Lovesac's revenue fell 6.1% year on year to $132.6 million but beat Wall Street's estimates by 3.6%. For next quarter, the company is guiding for flat year on year revenue of $156 million, slowing from the 4% year-on-year increase it recorded in the same quarter last year. Looking ahead, Wall Street expects sales to grow 5.2% over the next 12 months, an acceleration from this quarter.

Operating Margin

Lovesac was profitable over the last two years but held back by its large expense base. It demonstrated weak profitability for a consumer discretionary business, producing an average operating margin of 3.4%.

Lovesac Operating Margin (GAAP)

This quarter, Lovesac generated an operating profit margin of negative 13.5%, down 9.4 percentage points year on year. Looking ahead, Wall Street expects Lovesac to become more profitable. Analysts are expecting the company’s trailing 12 month operating margin of 2.6% to rise to 3.9% in the coming year.

EPS

Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.

Lovesac's full-year EPS flipped from negative to positive over the last five years. This is encouraging and shows it's at a critical moment in its life.

Lovesac EPS (GAAP)

In Q1, Lovesac reported EPS at negative $0.83, down from negative $0.28 in the same quarter last year. Despite falling year on year, this print beat analysts' estimates by 13.5%. Over the next 12 months, Wall Street expects Lovesac to grow its earnings. Analysts are projecting its EPS of $0.85 in the last year to climb by 57.3% to $1.34.

Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.

Lovesac has shown poor cash profitability over the last two years, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin averaged 1.1%, lousy for a consumer discretionary business.

Lovesac Free Cash Flow Margin

Lovesac burned through $14.31 million of cash in Q1, equivalent to a negative 10.8% margin. The company's quarterly cash flow turned negative after being positive in the same quarter last year, but we wouldn't read too much into it because working capital needs can be seasonal and cause quarter-to-quarter swings in the short term.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was its growth capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money it has raised (debt and equity).

Although Lovesac hasn't been the highest-quality company lately, it historically found a few growth initiatives that worked out well. Its five-year average ROIC was 20.2%, impressive for a consumer discretionary business.

Lovesac Return On Invested Capital

The trend in its ROIC, however, is often what surprises the market and moves the stock price. Unfortunately, Lovesac's ROIC averaged 9.6 percentage point decreases each year over the last few years. We like what management has done in the past but are concerned its ROIC is declining, perhaps a symptom of fewer profitable business opportunities.

Balance Sheet Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly.

Lovesac reported $72.36 million of cash and $184.3 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.

With $45.9 million of EBITDA over the last 12 months, we view Lovesac's 2.4x net-debt-to-EBITDA ratio as safe. We also see its $2.15 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.

Key Takeaways from Lovesac's Q1 Results

We were impressed by Lovesac's optimistic earnings forecast for next quarter, which blew past analysts' expectations. We were also glad its full-year revenue guidance came in higher than Wall Street's estimates. Zooming out, we think this was a fantastic quarter that should have shareholders cheering. The stock is up 1.6% after reporting and currently trades at $26.40 per share.

Is Now The Time?

Lovesac may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Lovesac, we'll be cheering from the sidelines. Although its revenue growth has been exceptional over the last five years, its low free cash flow margins give it little breathing room. And while its projected EPS for the next year implies the company's fundamentals will improve, the downside is its operating margins reveal poor profitability compared to other consumer discretionary companies.

Lovesac's EV-to-EBITDA ratio based on the next 12 months is 8.1x. While one can find things to like about Lovesac and its valuation is reasonable, we think there are better opportunities elsewhere in the market.

Wall Street analysts covering the company had a one-year price target of $31.83 right before these results (compared to the current share price of $26.40). Readers should still exercise caution as analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other lucrative business lines. As a result, they typically hesitate to say bad things for fear they will lose out on other business. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds of the data being released, and especially for companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.

Is Now The Time?

Lovesac may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Lovesac, we'll be cheering from the sidelines. Although its revenue growth has been exceptional over the last five years, its low free cash flow margins give it little breathing room. And while its projected EPS for the next year implies the company's fundamentals will improve, the downside is its operating margins reveal poor profitability compared to other consumer discretionary companies.

While there are some things to like about Lovesac and its valuation is reasonable, we think there are better opportunities elsewhere in the market right now.

Wall Street analysts covering the company had a one-year price target of $31.83 per share right before these results (compared to the current share price of $26.40).

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds of the data being released, and especially for companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.