Lovesac Co annual report, FY2021

The Lovesac Company — FY2021 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended January 31, 2021, compared with the fiscal year ended February 2, 2020; both were 52-week years. Lovesac designs and sells modular Sactionals, foam-filled Sacs and related accessories through ecommerce, 108 showrooms, and third-party retail touchpoints. The business is seasonal: the fourth fiscal quarter generated 40.4% of FY2021 sales.

Financial and operating performance

MetricFY2021FY2020
Net sales$320.7 million$233.4 million
Gross profit / margin$174.8 million / 54.5%$116.7 million / 50.0%
Operating income (loss)$14.9 million$(15.8) million
Net income (loss)$14.7 million$(15.2) million
Diluted earnings (loss) per share$0.96$(1.07)
Cash from (used in) operations$40.5 million$(11.2) million
Capital expenditures$9.1 million$10.7 million
  • Sales growth and mix: Net sales rose 37.4%. Ecommerce sales increased 170.8% to $151.1 million, or 47.1% of total sales, compared with 23.9% in FY2020. Showroom sales declined 1.3% to $146.2 million; other-channel sales declined 20.5% to $23.5 million.
  • Products: Sactionals generated $271.0 million, about 84.5% of sales, versus $188.4 million and 80.7% in FY2020. Sacs contributed $45.0 million, about 14.0%, compared with $39.6 million and 17.0%.
  • Margins and expenses: Gross margin improved 450 basis points, reflecting fewer promotional discounts, richer Sactional mix, lower inventory reserves, tariff mitigation and distribution-cost leverage. SG&A was $111.4 million, up 13.5% but down as a share of sales to 34.7% from 42.1%. Marketing expense rose 43.6% to $41.9 million, or 13.1% of sales.
  • Cash, liquidity and obligations: Cash and equivalents were $78.3 million at year-end, up from $48.5 million. Current assets were $143.4 million and current liabilities $56.3 million. No revolving-credit borrowings were outstanding; borrowing availability was $15.9 million. The company reported $92.4 million of future minimum operating lease payments, which are contractual lease commitments, not reported debt.

Material changes versus FY2020

  • The company moved from a $15.2 million net loss to $14.7 million net income, while operating cash flow improved by $51.7 million to $40.5 million.
  • Revenue growth was driven by ecommerce and increased new-customer transactions; total units sold nevertheless fell 18.4% year over year. Showroom point-of-sale transactions at comparable locations were nearly flat.
  • Customer acquisition cost increased to $434.61 from $391.71. The disclosed FY2021 new-customer cohort first-year value was $2,044; the reported CLV/CAC ratio was 4.70 versus 4.68.
  • The company opened 19 showrooms and closed two, ending the year with 108. It hosted 153 Costco in-store pop-ups versus 756 the prior year and said it did not expect further Costco in-store pop-up contribution. Macy’s shop-in-shop test ended in January 2021; Lovesac had expanded shop-in-shops to Best Buy.

Outlook, commentary and risks

  • Management said cash, expected operating cash flow and available credit were expected to meet working-capital needs and anticipated capital expenditures for at least 12 months. The filing does not provide numeric sales or earnings guidance. Management expected annual marketing investment to remain around 12%–14% of sales and anticipated CAC could continue to rise as it targets Sactional customers.
  • Management attributed strong demand partly to pandemic-related home spending and the shift online, but cautioned that ecommerce demand may recede as pandemic effects subside. Showrooms were temporarily closed in FY2021, then reopened; further closures were possible.
  • Key exposures include reliance on a small number of suppliers, including a single Texas manufacturer for Sacs; international sourcing, tariffs, freight capacity and raw-material costs; inventory management; ecommerce and cybersecurity disruptions; consumer-spending weakness; competition; and showroom lease commitments.
  • Adoption of lease accounting in FY2022 was expected to add approximately $92 million of lease liabilities and corresponding right-of-use assets to the balance sheet, including about $14 million short-term and $78 million long-term.
  • The company recorded a $0.2 million impairment charge for an underperforming retail location. It reported no goodwill impairment and said ordinary-course legal matters were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.

Important facts for investors to verify

  1. Whether ecommerce growth and customer demand remain durable after pandemic-related shifts, and how sales evolve across ecommerce, showrooms and partner channels.
  2. Whether gross-margin improvement persists amid freight, sourcing and tariff pressures, and whether higher marketing spend continues to support customer lifetime value relative to acquisition cost.
  3. Inventory levels, supplier concentration and fulfillment performance as demand and shipping conditions change.
  4. The cash-flow and balance-sheet effects of the approximately $92 million lease-liability recognition under the new lease standard.
  5. Potential dilution from outstanding warrants, options and equity awards; the company reported 15.0 million common shares outstanding at January 31, 2021 and no planned dividends in the foreseeable future.