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Lovesac: Time To Divest

Feb. 06, 2023 8:32 AM ETThe Lovesac Company (LOVE)12 Comments
Gary Alexander profile picture
Gary Alexander


  • Shares of Lovesac have soared 30% this year after sharp declines in 2022.
  • The outlook for the company doesn't look much brighter, with sales growth decelerating and inventory piling.
  • In addition, gross margins are being pressured by higher freight costs and more aggressive discounting.
  • Though cheap at ~12x forward P/E, I find it difficult to believe Lovesac can hit consensus estimates with both top and bottom line pressures weighing.

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Gary Alexander profile picture
With combined experience of covering technology companies on Wall Street and working in Silicon Valley, and serving as an outside adviser to several seed-round startups, Gary Alexander has exposure to many of the themes shaping the industry today. He has been a regular contributor on Seeking Alpha since 2017. He has been quoted in many web publications and his articles are syndicated to company pages in popular trading apps like Robinhood.

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.

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Comments (12)

cruiser88 profile picture
You recommended buying this stock in 4 previous articles, all at higher prices than current. Q4 revenue up 21% y/y, FY24 guidance raised to $700-740M, $1.83-2.24 EPS. I wonder if you still maintain your sell rating?
- If comparable sales growth was 9% AND they are expanding, why is it difficult to reach 11% YoY growth target? Only because of the interest rates / mortgage / house market situation? Yes, this is a risk indeed, but not sure how much known...anyway, if, let's say only 9% growth instead of 11%, not so bad
- Gross margin under pressure again not sure why: freight / fuel cost is kind of "stabilizing" (like management is saying). Then, they have some inventory, but that's kind of a very short-term problem
-Opex increases will give low / negative EPS...hmm...I would like to see that for a whole year, one quarter is nothing (even 3 quarters I doubt, maybe the 4th quarter is pretty important :))
I like this company too (both as a consumer and as an investor). And I bought a fairly large position just after Q3 earnings. However, I tend to agree with the author's conclusions, if we focus on the short-term outlook.

Consider that the stock stood at $22.49 the day before Q3 earnings. On Q3 earnings day it sold off sharply, down to $17.71. Now it has soared way past the pre-Q3 earnings level, and is currently sitting at $28.17 - importantly: without ANY notable company-related news, but instead simply reflecting broader market sentiment (which one could also question).

I fear the author might be correct in stating that the negative drivers having impacted on their Q3 top and bottom line will likely exacerbate into 2023. It's an assumption, but one that makes sense to me. The operational cost savings (e.g. freight) will likely be more than offset by subdued revenue over the next couple of quarters.

I do have high conviction long term, and will definitely buy back in at some point, certainly if it revisits the $20 mark (and also above that level if/when the outlook brightens). For now though, I have significantly trimmed my position.
Naples Investor profile picture
@ErwinIgel agree on all of that.
Naples Investor profile picture
I got assigned shares for sub $20 by selling puts repeatedly and then sold some $25 covered calls and had the shares taken away. About a 30% profit in less than five months.


I am hoping we are in a bear market rally and the stock comes back down to $20. I will buy back in and sell a bunch more puts!
Yes, if you have a less than 1 year time horizon. Of course it is affected by macro, 5 year time this will be a multi bagger . Q4 is highly cash generative quarter and will boost the balance sheet
I think a lot of the decelaration is already priced in, but will see at the earnings report. Anyway, if it drops, it is an opportunity to pick some, as I see it as a potential multibagger
Ghost of Graham profile picture
@Zoisdem I agree. We need to stay levelheaded about it. KO sells at 24x earnings and there's a very hard upper limit on their 7-8% expected growth going forward long term. I get that people like to pay a premium for safety, but that's a little nuts to me.

Even though current price of $28 is way above recent prices at sub-$20/share, the "grand" picture, the very big picture is that earnings growth is expected at 27%, 78%, and 21% for the next three years according to fast graph. Half each of those, and you're STILL looking at a deal at $28.
Maybe short term? Maybe? But this is a buy for long term investors
Ghost of Graham profile picture
I would suggest that all the reasons stated in your article are explanations as to why we can buy this company at 12.5x forward earnings. Even if the supposedly horrendous deceleration of growth down to 15% annually stayed that way long term, would 12x earnings not be a reasonable price for that? Further, the cash position of 3 million makes sense if you realize their dynamics. Q4 is their megahaul of the year. It makes sense to spent the last bit of cash they have on advertising and new store-in-stores.

Thanks for the article. I don't see this company in a precarious position - just transitioning through tough seas decently. The fact of the matter is we have a winning product in a huge TAM from a company that cares about offering customers something amazing. At 12x forward earnings, and with a megaquarter coming in shortly, I'm happy to hold. There's no reason to think revenue can't rebound to at least 20% for the next few years, given it's history and strategy and popularity. With a few years of stability the multiple won't be 12x, it'll be 25-30x.
Nothing has changed 24 to 36 month PT $75 plus
Augie91 profile picture
Was fortunate to buy small position at 52 week lows. Will buy more if it falls again. Long term focus. Goal is to buy one of their couches in 5ish years. Love their products! Thanks for writing your article, I look forward to reading more!
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