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Lovesac: Key Takeaways From The Q3 Results

Dec. 08, 2022 5:20 AM ETThe Lovesac Company (LOVE)21 Comments
Bela Lakos profile picture
Bela Lakos


  • Net sales growth despite the challenging macroeconomic environment, fueled by more aggressive advertisement and the opening of additional pop-up shops and shop-in-shops.
  • As the firm could not pass on the additional costs to the customers, margins have contracted. It may indicate that the demand for LOVE's products is relatively elastic.
  • Inventory levels have substantially grown year-over-year. If inventory becomes obsolete, it may lead to further margin contractions.
  • We maintain our "hold" rating.
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The Lovesac Company (NASDAQ:LOVE) designs, manufactures, and sells furniture. We have published an article on the firm in June 2022, titled: "Declining Consumer Confidence May Slow Lovesac's Growth". At that time, we have rated LOVE's stock as a hold, due to

This article was written by

Bela Lakos profile picture
Petroleum engineer with an enthusiasm for investing, accounting and personal finances.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Past performance is not an indicator of future performance. This post is illustrative and educational and is not a specific offer of products or services or financial advice. Information in this article is not an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. This article has been co-authored by Mark Lakos.

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Comments (21)

Britton Bush profile picture
@Ghost of Graham is right. This is a Peter Lynch stock.

— Look at gross margin compared to other furniture companies, LOVE is significantly higher.
— Inventory has been growing steadily over time consistent with revenue. This shouldn’t necessarily be a surprise; as the amount of net sales and size of a company increases, then inventory generally increases as well. Additionally, as others have pointed out, LOVE’s inventory is more robust due to the modularity of sactionals. Also, one should consider that inventory is higher this quarter (Q3FY2023) to support the higher demand expected for the holiday season (Q4FY2023). The CEO makes a comment to this effect in the press release “We believe we are well positioned for the all-important fourth quarter holiday-season where early signs point to strong cash flow generation for the quarter.”
— Valuation is at all time lows. LOVE has zero long term debt.
— SG&A and Advertising as a percentage of sales are going up, which is unfavorable, but understandable given the reduction in consumer discretionary demand in conjunction with the current economic environment. However, I would reiterate what others have said, brand awareness and market share capture are hugely important, and if LOVE can expand its brand and market share in this environment by exercising relatively higher marketing and advertising, then that is a good thing for the long term shareholder.
— I see relatively low downside risk and significant upside potential over the next 5 years. Assuming we emerge from this recessionary cycle (like history has shown that we always eventually do…), say in 5 years or so, then it is unlikely that this level of growth will be trading at the current low valuation levels.
— Others have pointed out, analysts project earnings growth of ~20% over the next two years. Non-GAAP (FWD) PEG is 0.25! LOVE is a BUY.
Inventory has increased dramatically QoQ while cash has decreased quite substantially. Luckily for them their products aren’t seasonal and have a very low risk of obsolescence. Many retailers are facing inventory gluts due to the bullwhip effect from Covid. The next couple of quarters are going to be key for Lovesac to turn that inventory into sales so they don’t experience a cash crunch. The company is trying very hard to disrupt the furniture industry and time will tell if they can get over the hump. A common misconception is that low P/E companies such as Lovesac are “lower risk” because of their multiples, but it’s the contrary. These are some of the riskier companies to bet on since the upside in theory is so high if they can execute their business plan; the risk is proportionate since they may have to dilute their stock to raise cash or may just lose relevancy in general. Wall St does not believe this company is going to make it as reflected by the share price but if it does, you will most certainly hit a multibagger over the next decade.
@Maximilian Alexander I would be very disappointed if we see any accelerated shareholder dilution here. They would first need to pick up some debt, also, they clearly signalled a cash generating Q4. Hence if they disappoint on this front, that would be deviously misleading management commentary in Q3 call
@Maximilian Alexander these are fair points. I would just add that the depressed multiple does not necessarily mean that the market doesn’t think the company will “make it.” The market May very well (likely correctly) believe that this is dead money for some time until the fed pivots and recession is in the rear view mirror
Bela Lakos profile picture
@Maximilian Alexander I completely agree with you on the cash crunch part. I believe many people underestimate, how important financial flexibility is during times of downturns.
Author riding on inventory risk signals to me he didn't yet familiarize with Lovesac's evergreen and lean product platform - sactionals. Hope I am wrong on the amount of research conducted by the author prior to writing about the stock.
jaynemesis profile picture
@Belu21 Seems to be a recurring theme for people "analysing" $LOVE - their products are specifically designed to avoid redundancy. If anything, they incentivize ongoing future sales.
@jaynemesis The recurring nature and stickiness seems to be quite unique in its category. Though it will need to show its advantages in above sector profitability not just sales growth. I am banking on this to see a re-rating of the stock
Bela Lakos profile picture
@Belu21 Thanks for your opinion! To a certain extent I agree with you. But my main concern with inventory is related to the consumer sentiment. During times of low consumer confidence, people are likely to spend less on durable products, like the product of Lovesac. In Q3 it has been already pointed out that the marketing expenses had to be substantially increased to keep the demand high.
Before investing in the firm's stock I would like to see an improving consumer sentiment and also the company's ability to reduce inventory. The main question is, when the sentiment starts to improve, will people still want Lovesac's products, which are currently in inventory, or would they like newer models?
Psmith6545 profile picture
Thanks for the update. Have recently traded, like the story. Like the vaule as growing revenue with almost no debt. But have been challenged by how many will pay for a $7000 couch.
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