Lovesac (LOVE)

Furniture company Lovesac (NASDAQ:LOVE) reported Q1 CY2025 results exceeding the market’s revenue expectations, with sales up 4.3% year on year to $138.4 million. Revenue guidance for the full year exceeded analysts’ estimates, but next quarter’s guidance of $161.5 million was less impressive, coming in 0.6% below expectations. Its GAAP loss of $0.73 per share was 9% 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 have short-term success, but a top-tier one grows for years. Thankfully, Lovesac’s 22.7% annualized revenue growth over the last five years was impressive. 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 1.7% over the last two years was well below its five-year trend.

This quarter, Lovesac reported modest year-on-year revenue growth of 4.3% but beat Wall Street’s estimates by 0.7%. Company management is currently guiding for a 3.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 6% 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.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Lovesac’s operating margin might fluctuated slightly over the last 12 months but has generally stayed the same, averaging 2.5% over the last two years. This profitability was lousy for a consumer discretionary business and caused by its suboptimal cost structure.

In Q1, Lovesac generated an operating margin profit margin of negative 10.8%, up 2.7 percentage points year on year. This increase was a welcome development and shows it was more efficient.

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 Q1, Lovesac reported EPS at negative $0.73, up from negative $0.83 in the same quarter last year. This print beat analysts’ estimates by 6.9%. Over the next 12 months, Wall Street expects Lovesac’s full-year EPS of $0.70 to grow 25.7%.

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 broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.

Lovesac burned through $49.95 million of cash in Q1, equivalent to a negative 36.1% margin. The company’s cash burn increased from $14.31 million of lost cash in the same quarter last year.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared 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 28.1%, 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 $26.9 million of cash and $191.6 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 $49.6 million of EBITDA over the last 12 months, we view Lovesac’s 3.3× net-debt-to-EBITDA ratio as safe. We also see its $2.72 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.

We were impressed by Lovesac’s optimistic EBITDA guidance for next quarter, which blew past analysts’ expectations. We were also glad its EBITDA outperformed Wall Street’s estimates.Overall, we think this was still a solid quarter with some key areas of upside. The stock traded up 1.7% to $17.10 immediately following the results.

Updated: June 14, 2025 at 10:49 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Lovesac, you should also grasp the company’s longer-term business quality and valuation.

Lovesac’s business quality ultimately falls short of our standards. Although its revenue growth was impressive over the last five years, it’s expected to deteriorate over the next 12 months and its low free cash flow margins give it little breathing room. 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 EV-to-EBITDA ratio based on the next 12 months is 4.9x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $30.17 on the company (compared to the current share price of $17.31).

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.