The Lovesac Company — Q2 FY2021 Form 10-Q
Reporting period: The 13 weeks ended August 2, 2020, with first-half results covering 26 weeks. Comparatives are the periods ended August 4, 2019; balance-sheet changes are versus February 2, 2020. Results are unaudited. The company designs and sells modular Sactionals, Sacs and related products through showrooms, ecommerce and retail partnerships.
Financial performance and liquidity
| Metric | 13 weeks ended Aug. 2, 2020 | Prior-year quarter | 26 weeks ended Aug. 2, 2020 | Prior-year half |
|---|---|---|---|---|
| Net sales | $61.9 million | $48.1 million | $116.3 million | $89.1 million |
| Gross profit / margin | $31.1 million / 50.1% | $24.3 million / 50.4% | $58.3 million / 50.2% | $45.3 million / 50.8% |
| Operating loss | $(1.0) million | $(4.9) million | $(9.4) million | $(14.3) million |
| Net loss | $(1.1) million | $(4.8) million | $(9.5) million | $(13.9) million |
| Basic and diluted loss per share | $(0.08) | $(0.33) | $(0.65) | $(0.99) |
| Adjusted EBITDA, non-GAAP | $2.2 million | $(3.3) million | $(3.5) million | $(8.0) million |
- Quarterly sales grew 28.7%; first-half sales grew 30.5%. Internet sales were $46.1 million for the quarter and $76.1 million for the half, versus $9.5 million and $17.9 million, respectively. Ecommerce represented 74% of quarterly sales and 66% of first-half sales.
- Showroom sales fell 58.9% in the quarter and 46.8% in the half as COVID-19 closures curtailed in-person selling. Sactionals accounted for 86.4% of quarterly sales and 83.7% of first-half sales.
- Gross margin declined 31 basis points in the quarter and 66 basis points in the half. Higher distribution and tariff costs outweighed some product-cost savings from vendor negotiations and shifting sourcing from China to Vietnam and Malaysia.
- Cash and cash equivalents were $54.8 million at August 2, up $6.3 million from February 2. First-half operating cash flow was positive $12.1 million, compared with negative $23.0 million a year earlier. Increases in accounts payable, accrued expenses and customer deposits supported cash generation; inventory increased $4.6 million.
- Investing cash outflow was $5.3 million, principally for showroom, infrastructure and patent/trademark investments. Financing cash outflow was $0.5 million, mainly taxes on net share settlements.
- Working capital was $59.7 million. No borrowings were outstanding under the $25 million Wells Fargo revolving facility; borrowing availability was $9.9 million. The company reported no other debt balance in the filing.
Material changes and management commentary
- COVID-19 prompted closure of all showrooms beginning March 18; locations had reopened in some format by the reporting date, many virtually or by appointment. The company redirected sales efforts online and adapted technology, supply chain and logistics for higher ecommerce demand.
- Management attributed strong online demand in part to the “Heroes” campaign, which honored first responders and frontline workers and drove over half of sales during the campaign period, with redemptions continuing into early June. New customers increased 47.8% in the quarter and 52.5% in the half, according to management.
- The company reduced its workforce by approximately 447 part-time employees, or 57% of headcount, temporarily cut executive and other compensation, and later rehired 137 part-time showroom associates. Management said it tightly managed inventory, marketing, working capital and capital spending.
- SG&A as a share of sales fell to 37.7% for the quarter from 45.6%, and to 42.3% for the half from 51.4%, largely reflecting expense leverage. Advertising and marketing spending rose 18.1% in the quarter and 34.1% in the half.
- Management stated that existing cash, expected operating cash flows and the credit facility should cover working-capital needs and anticipated capital expenditures for at least 12 months. It gave no specific earnings or revenue guidance and noted full-year results are uncertain and seasonal, with most activity typically in the fourth quarter.
Risks, contingencies and unusual items
- COVID-19 remains a material uncertainty: renewed restrictions, reduced showroom traffic, changes in consumer spending, workforce impacts or supply-chain disruption could harm results and liquidity. Management warned additional financing might be needed if conditions persist; access to financing is not assured. It does not currently expect a contribution from Costco for the balance of the fiscal year.
- Operating leases total $84.9 million in future minimum payments, including $5.4 million due for the remainder of fiscal 2021. The company expects lease accounting standard adoption in fiscal 2022 to materially affect its balance sheet.
- Potential severance exposure under executive agreements was $3.2 million if covered executives were terminated without cause and full severance became payable. Management said ordinary-course legal matters were not expected to have a material adverse effect.
- The company maintained a full valuation allowance against deferred tax assets and recorded no tax benefit on operating losses. Tariffs and distribution costs pressured gross margin.
- The “Heroes” campaign, COVID-related workforce and compensation measures, and significant channel mix changes were notable period factors. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP results or cash flow.
Key facts for investors to verify
- Whether exceptional ecommerce growth and new-customer gains persist as showrooms and third-party retail channels resume normal operations.
- Whether the company can improve gross margin despite tariff, distribution and fulfillment costs, and whether sourcing changes deliver lasting savings.
- The sustainability of positive operating cash flow, particularly given the contribution from higher customer deposits and payables, and the effect of seasonal inventory needs.
- Current credit-facility availability and covenant headroom, given $9.9 million of reported availability and no outstanding borrowings at quarter-end.
- How COVID-19, showroom operations, Costco activity and the company’s substantial lease commitments affect liquidity and results in subsequent quarters.
- Reconciliation and exclusions underlying Adjusted EBITDA, alongside GAAP operating loss, net loss and cash flow.