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The Lovesac Company (LOVE) - Wall Street’s Best Digest Daily Alert - 4/22/21

This furniture maker had a great quarter, beating analysts’ EPS estimates of $0.58, and bringing home earnings of $1.37 per share. Revenues were up 40.7%, coming in at $129.7 million, handily surpassing estimates of $116.1 million.

This furniture maker had a great quarter, beating analysts’ EPS estimates of $0.58, and bringing home earnings of $1.37 per share. Revenues were up 40.7%, coming in at $129.7 million, handily surpassing estimates of $116.1 million.

The Lovesac Company (LOVE)
From Canaccord Genuity Research

Lovesac reported strong 4Q21 results, with 41% y/y total revenue growth and record profitability, capping off a year when the company’s omnichannel strategy enabled it to successfully navigate COVID. A record number of product demos were completed last year despite showroom closures and restrictions, and Lovesac grew total transactions 32% y/y and saw AOV expand 11% y/y, as reduced promotional activity and a mix shift to higher-value products fueled a gross margin recovery.

Lovesac continues to refine its consumer touch points, including a planned expansion of the Best Buy relationship and tests of new initiatives like at-home demos and a post-purchase specialist program.

The company’s Q1 and FY22 outlook implies continued top-line momentum and the resumption of investments that were put off last year due to COVID that may limit profitability upside, and the planned launch of a new product offering is likely delayed to 2H as a result of supply chain disruptions.

Management continues to execute on a variety of strategic initiatives, and we expect improving marketing efficiency, product innovation, and a focus on sustainability will drive market share gains over time.

  • Operating leverage, reduced promotions, and improved product sourcing drive GM expansion: Lovesac’s net sales grew 40.7% y/y to $129.7M in 4Q21 (ended 1/31), ~15% ahead of CGe. Comparable showroom sales grew 23% y/y as all locations have now fully reopened to the walk-in phase and Lovesac hosted 11K appointments (+27% q/q), while eCommerce sales growth remained strong at 86% y/y as the new website continues to drive heightened conversion. Gross margin expanded ~890bps y/y and 260bps sequentially to 57.9%, well ahead of CGe, reflecting ~508bps of improvement related to a reduction in promotional discounts, reduced inventory reserve levels, and product cost savings related to vendor negotiated tariff mitigation efforts, along with 382bps of improvement due to leverage on warehousing and freight costs. Lovesac reported adj. EBITDA of $25.9M, representing a ~20% margin, well ahead of both CGe and consensus and marking the company’s third consecutive quarter of positive adj. EBITDA.
  • Ongoing innovation for both products and distribution: During 4Q21 Lovesac began selling Sactionals on, and the company further expanded the relationship in March by opening its fourth Best Buy shop-in-shop location, with plans to open 15 more over the next two years. The Costco business remained exclusively online as the terms for physical roadshows are renegotiated, and Lovesac ended its test of Macy’s shop-in-shops to focus on other potential partners. The company has begun testing new customer touch points, including (1) a mobile concierge, (2) mobile showrooms that bring demos to people’s homes, (3) virtual appointments in areas without showrooms, and (4) a post-purchase specialist program, where associates proactively communicate with customers at key milestones throughout the delivery experience. In February Lovesac launched a new Guest Rest Bedding Kit, which includes a mattress topper and sheet set to convert four Sactional pieces into a bed for overnight guests. While the anticipated new product launch has been delayed (likely to 2H FY22) due to supply chain disruptions for key components, management reiterated that this product will redefine category expectations and grow Lovesac’s TAM, with its product pipeline also including upcoming 3P brand collaborations.
  • Outlook reflects strong demand, heightened investments: LOVE expects 1Q22 revenue growth of ~38% y/y, slight y/y GM improvement, and an adj. EBITDA dollar loss in line with 1Q21. The company did not provide formal FY22 guidance but noted it plans to open over 20 showrooms and that if revenue growth is low-to-mid 20%, GM will be flat y/y and adj. EBITDA margin will be mid-single digits, reflecting the resumption of investments that were put off last year.

Valuation: We are raising our estimates and PT to $77 (from $65), based on 2.5x our fiscal 2023 revenue estimate (vs. 2.4x 2022 prior) and supported by DCF valuation.

Maria Ripps, CFA, Michael Graham, CFA, Jason Tilchen, CFA, Canaccord Genuity Research,, April 15, 2021