Lovesac (LOVE)

Furniture company Lovesac (NASDAQ:LOVE) announced better-than-expected revenue in Q4 CY2024, but sales fell by 3.6% year on year to $241.5 million. The company expects next quarter’s revenue to be around $139 million, close to analysts’ estimates. Its GAAP profit of $2.13 per share was 13.7% above analysts’ consensus estimates.

Company Overview

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

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

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Luckily, Lovesac’s sales grew at an impressive 23.9% compounded annual growth rate over the last five years. Its growth beat the average consumer discretionary company and shows its offerings resonate with customers.

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 performance shows its demand has slowed significantly as its annualized revenue growth of 2.2% over the last two years was well below its five-year trend.

This quarter, Lovesac’s revenue fell by 3.6% year on year to $241.5 million but beat Wall Street’s estimates by 4.9%. Company management is currently guiding for a 4.8% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 4.3% over the next 12 months. Although this projection indicates its newer products and services will spur better top-line performance, it is still below average for the sector.

Lovesac’s operating margin has been trending down over the last 12 months and averaged 3.2% over the last two years. Although this result isn’t good, the company’s top-notch historical revenue growth suggests it ramped up investments to capture market share. We’ll keep a close eye to see if this strategy pays off.

In Q4, Lovesac generated an operating profit margin of 19.7%, up 3.6 percentage points year on year. This increase was a welcome development, especially since its revenue fell, showing it was more efficient because it scaled down its expenses.

Revenue trends explain a company’s historical growth, but the long-term change in 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.

In Q4, Lovesac reported EPS at $2.13, up from $1.87 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Lovesac’s full-year EPS of $0.60 to grow 72.4%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Lovesac has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 4.8%, lousy for a consumer discretionary business.

Lovesac’s free cash flow clocked in at $38.74 million in Q4, equivalent to a 16% margin. The company’s cash profitability regressed as it was 3.7 percentage points lower than in the same quarter last year, but it’s still above its two-year average. We wouldn’t put too much weight on this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends carry greater meaning.

Over the next year, analysts predict Lovesac’s cash conversion will slightly fall. Their consensus estimates imply its free cash flow margin of 2.6% for the last 12 months will decrease to 1.1%.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Lovesac hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 28%, splendid for a consumer discretionary business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Lovesac’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Lovesac reported $83.73 million of cash and $183 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 $47.79 million of EBITDA over the last 12 months, we view Lovesac’s 2.1× net-debt-to-EBITDA ratio as safe. We also see its $2.80 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was impressive that the company beat across the board on revenue, EBITDA, and EPS despite a choppy macro. It was also great to see Lovesac’s full-year revenue and EBITDA guidance top analysts’ expectations. Overall, we think this was a very strong quarter with some key metrics above expectations. The stock traded up 9.7% to $17.45 immediately following the results.

Updated: May 21, 2025 at 10:51 PM EDT

Before deciding whether to buy Lovesac or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Lovesac isn’t a terrible business, but it doesn’t pass our quality test. Although its revenue growth was impressive over the last five years, it’s expected to deteriorate over the next 12 months and its Forecasted free cash flow margin suggests the company will ramp up its investments next year. And while the company’s stellar ROIC suggests it has been a well-run company historically, the downside is its operating margins reveal poor profitability compared to other consumer discretionary companies.

Lovesac’s P/E ratio based on the next 12 months is 42x. At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $31.67 on the company (compared to the current share price of $18.96).

Although the price target is bullish, readers should exercise caution because 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 rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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