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Lovesac: My #1 Pick For 2023

Dec. 25, 2022 3:36 AM ETThe Lovesac Company (LOVE)34 Comments


  • Lovesac is my top pick for 2023.
  • I see the stock as pricing in all but the worst and harshest recession scenarios.
  • I believe the stock has massive upside potential in 2023 and beyond.
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While 2022 has seen trillions of dollars wiped out from investors’ account balances globally, periods such as this create enormous opportunities if one knows where to look. Not all bear markets are created equal, and this one has hammered

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This article was written by

Josh Arnold profile picture

Josh Arnold has been covering financial markets for a decade, utilizing a combination of technical and fundamental analysis to identify potential winners early on in their growth cycles. Josh's focus is mainly on growth stocks. His goal is efficient and profitable use of capital, which overly rigid buy-and-hold strategies do not allow.

Josh is the leader of the investing group Timely Trader where he focuses on limiting risk and maximizing potential reward. Features of Timely Trader include: real-time alerts, a model portfolio, technical charts, sentiment indicators, and sector analysis to find the best trading opportunities. Learn more.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of LOVE either through stock ownership, options, or other derivatives. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (34)

Simon_JPS profile picture
"In addition, it has not issued any stock to fund expansion. Like just about every company, it does issue some stock for compensation, but it’s quite minimal. Point being, Lovesac is not “hiding” its financing needs through share issuances; it’s been able to do everything it needs to with internal funding."

Well, it appears that this is factually wrong. I've just read another article on Lovesac where I can read:
"Since its IPO in Q2 of 2018 (4 years), Lovesac has increased its shares outstanding by 150%. That's not great news. However, as you can see in the graph, Lovesac has tremendously slowed its share issuance since Q3 of 2019. Additionally, since Lovesac hit profitability in Q2 of 2021, they have increased shares outstanding by <1%. Hopefully, now that Lovesac has reached profitability, they should be able to support most of their expansion through FCFs."

So why they abstained from meaningful share issuance in the last 3-4 years, clearly they funded their expansion by issuing stock and thereby met their financing needs.

Will they do so again when they burn through their cash with the negative free cash flow? That's the question.

Lastly, thanks for the article! So, basically, if I get you right you're saying that free cash flow has been negative because of the inventory build-up? How does that work, concretely? It costs so much cash to store inventory? I try to understands the dynamics of this, I'm not the habitual retail investor.
Some items on costco website now it is a matter of time until it shows up on the floor, yet another source of revenue for LOVE very bullish going to keep accumulating for the next six months and hold for gold for at least 18 months
In at 22.35 1500 shares planning on riding it up to $85 to $115 in the next 36 months
Ghost of Graham profile picture
@bluesblues Almost the same story for me. Hard to believe we're directionally wrong on this one. I can't comprehend how any of the risks are material or realistic.
Good volume today. Insiders purchased 10/13, 12/21, 12/30 at ranges between 19.17 and 22.28.
Psmith6545 profile picture
Thanks Josh, have been watching and trading for a while. Agree, how can ypu not 'love' a company with no debt. Their products just seam too expensive.. sales will tell. Was turned toward Indonesian as an EEM play, where a lot of LOVE is manufactured.
Augie91 profile picture
In at $18.50. Goal is to establish a small position to cash in someday for one of their couches. My flex steel couch is crap. Lovesac couches are expensive but built to last and very flexible!
Ghost of Graham profile picture
@Augie91 Great starting price. I was in at 25, I've averaged down to just under 22. I will sell off the shares bought at 25 since I'm close to overweight on it. 25 is still a great price too though. I've been thinking if this goes the way it "should" I'll buy the couch itself too lol.
Naples Investor profile picture
@Augie91 I've sold 10 cash-secured puts and had 2 exercised. And I sold 4 covered calls without losing the shares. My average cost is $17.19.

I like their long-term growth story. The next year or two may be tough but long-term I think they will do very well. This is an opportunity for us to load up into a solid position.

My goal is to get 1,200 shares at a net cost of $20,000. IF things get really bad, I might be able to get 1,500 shares.
Naples Investor profile picture
@Naples Investor I was ready to sell some $20s and $17.50s and the stock popped up! LOL. This is a company that has a strong support level. Let's hope their Christmas shopping season was strong.
I was looking for something to relax in to listen to music. Went to a Love Sac store in Raleigh. I couldn’t help but laugh. $750.00 for a crappy beanbag chair that was probably $35 back in the 70’s. If you invest in these guys, look out. This is next years Peleton.

Bell bottom pants circled around again for about a year. Same-same with fuzzy bean bag chairs.
@rocketjs what did you think of the sactionals?
@rocketjs that’s only 10% of sales
Ghost of Graham profile picture
@rocketjs There may be some advanced pricing for the non-beanbag. But first of all, it's huge. Second of all, it's way more comfortable than any armchair ever created. Third of all I believe the warrantee is very generous (for life?) and the cover is replaceable in any shade or material you want. Just because it may be cheaper to make than a regular armchair, doesn't mean it should be priced less.
bazooooka profile picture
Nibble time
Ghost of Graham profile picture
Thanks for the article. I follow this one closely and have a position - about 3% of my portfolio. I'm of the opinion that a great company with a vastly superior product with a far more efficient business model than its industry peers, selling at under 9x earnings with no/little debt and growing at crazy rates, and finally, driven by it's clearly very passionate founder/CEO, is worth a big spot in a portfolio. And by big I mean 10%, which I'll get to over time depending on drops and cash availability. The low cash position of LOVE doesn't bother me (usually, it would), because inventory is high and Q4 is a big quarter for LOVE. I get that inventory "eats up cash"... maybe in stocking/storage costs. But it also means less inventory costs in the coming quarters, and any unsold inventory in Q4 will cover a chunk of next Q1.

I said it before on another LOVE article. This is a Peter Lynch stock. If there were 1400 Peter Lynch stocks, as there were for him in the late 70s and 80s, I'd diversity into those 1400 great stories. But I do think the market is more efficient than it used to be. Besides, I wouldn't buy the stock at all if I thought there was enough serious risk to give it only a small position.
Naples Investor profile picture
I just reread this but on my laptop instead of my phone so I could click on the illustrations/graphs and see them larger.

I found it humorous that in one of their slides they say they have an "inventory lite" business model and their cash problems right now are because of an inventory build-up.

Nonetheless, I am bullish on this for the long term and I see a floor in the high teens if not $20. Of course, if this Christmas shopping season was a bust then it could drop to $15ish.
@Naples Investor a big question for me lately has been considering whether the product is truly “evergreen”
Naples Investor profile picture
@Tripmcnealy223 we bought our sectional about 17 years ago and have moved three times and about to move a fourth time.

Each move has included a discussion about whether the sectional will fit the new house.

It's in excellent shape except one armrest which accumulated oil from my wife's arm before she realized what was happening.

Being able to wash and/or change covers is great. And being able to rearrange the components is great.
It's a mistake to say the Chipotle model "...works for everybody." Maybe it works for the 999,999 out of a million for whom pain is essential to the enjoyment of a meal, but it doesn't work for me because even the "mild" menu offerings are too spicy, and I haven't been inside one for a dozen years. The In 'n' Out model is better: the Chipotle model without obligatory heat.
Naples Investor profile picture
"without the use of the capital markets whatsoever."

It's publicly traded which means that is an incorrect statement.
@naples Investor without use of capital markets to raise additional capital.
Naples Investor profile picture
@lbeachmike OK. Fair enough.

Very good article.

I am not terribly bothered by the jump in inventory because lots of companies over ordered coming out of COVID.

Their AP didn't jump but their accrued expenses did.

They need to work on their cash conversion cycle. They sell direct to consumer so I am confused why they have AR. They should have a very short cash conversion cycle because they are mostly getting paid via credit card.

My biggest concern is their gross margin dropped below 50% for the first time. I am hoping that is because ocean shipping costs were sky high and now they are coming down.

I wish I sold some $17.50 puts on Wednesday or Thursday before the price jumped a buck.

I would be good going up to $20,000 for 1,100 shares. Currently have a small 200 share position at $18.51 a share including option premiums.
@Naples Investor yes they have shipped a lot of their stock at higher rates, once they sell off their stock gross margin should improve. Gross margin could be hurt by this recession but once we are out of that I see Lovesac as a big time multi bagger
sliman21 profile picture
A mild recession? I don’t think so. I would rather wait until the Fed has stopped raising rates and is starting to lower rates before I would buy the stock. Interesting situation.
Josh Arnold profile picture
@sliman21 fair enough, but it will be too late to buy by the time that has occurred. The stock will already be much higher than it is now, in my opinion.
sliman21 profile picture
@Josh Arnold It could be. However it will go much lower than it is right now if the recession is deep.
Naples Investor profile picture
@sliman21 I am long this stock but the last earnings call had some concerns because of the inventory build up. I am going to continue selling puts on this to reduce my cost or average down depending on if I get assigned or not.
ErikInvest profile picture
My one of best position atm.
Growth with multiple of tech stock without be a tech stock.

Inflation inventory has decreased the value but Recent partnership with Apple for promote their product, its a great step to survive over recession.

Insiders brought share on 19$, that’s why past week has gain a lot and is great confidence signal how is project to be over recession.

Management has made great until now but oblivious anyone can’t fight the fed.
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