The Lovesac Company (NASDAQ: LOVE) — Form 10-Q Summary
Reporting period: Fiscal 2023 third quarter, the 13 weeks ended October 30, 2022; year-to-date (YTD) covers the 39 weeks ended October 30, 2022. Comparisons are with the corresponding periods ended October 31, 2021, unless noted. The company designs and sells modular furniture, primarily Sactionals, through showrooms, e-commerce, and third-party retail touchpoints. Results are seasonal, with the fourth quarter typically strongest.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | YTD FY2023 | YTD FY2022 |
|---|---|---|---|---|
| Net sales | $134.8M | $116.7M | $412.7M | $302.0M |
| Gross profit / margin | $63.6M / 47.2% | $58.6M / 50.2% | $210.6M / 51.0% | $163.7M / 54.2% |
| Operating income (loss) | $(11.6)M | $3.0M | $0.9M | $14.2M |
| Net income (loss) | $(8.4)M | $2.8M | $0.6M | $13.3M |
| Diluted EPS | $(0.55) | $0.17 | $0.04 | $0.83 |
| Operating cash flow | Not separately provided for quarter | $(65.1)M | $(15.2)M |
- Q3 sales grew 15.5%; YTD sales grew 36.6%. Showroom sales rose 19.0% in Q3 and 41.6% YTD. Internet sales declined 6.3% in Q3 but increased 11.0% YTD. Other-channel sales, including shop-in-shops, pop-ups, and barter transactions, rose 61.8% in Q3 and 83.0% YTD.
- Q3 gross margin fell 300 basis points; YTD margin fell 320 basis points. Management attributed pressure chiefly to distribution and tariff costs, including warehouse volume deleverage and outbound freight, and to greater promotional discounting in Q3.
- Q3 SG&A rose 40.9% to $53.7M, faster than sales, reflecting employment and variable compensation, infrastructure spending, showroom rent, and selling costs. Advertising increased 20.3% to $19.1M. These expenses drove the quarterly operating loss despite higher revenue.
- YTD operating cash use was $65.1M, primarily reflecting inventory growth of $46.0M, prepaid and other current asset increases of $20.5M, and lease-liability payments. Investing cash use was $21.6M, mainly for new and remodeled showrooms and intangible assets.
- Cash was $3.8M at October 30, versus $92.4M at January 30; working capital was $96.5M. The company reported no line-of-credit borrowings and $36.0M of availability under its amended $40M asset-based facility, subject to borrowing-base restrictions. The facility matures in March 2024.
- Operating lease liabilities totaled $151.0M, including $20.8M current and $130.2M long-term. Total liabilities were $249.2M; stockholders’ equity was $158.2M.
Material changes and notable items
- Q3 shifted from prior-year profit to an $8.4M net loss. The reported $3.2M income-tax benefit partly offset the pretax loss; for YTD, the company reported $0.6M net income versus $13.3M a year earlier.
- Showroom count increased to 189 from 135 a year earlier. During the quarter, the company opened 16 showrooms, closed one, and remodeled three. It also operated 22 Best Buy shop-in-shops.
- YTD new-customer growth slowed to 4.1% from 13.7%, according to the overview; the MD&A separately reports showroom new-customer growth of 12.9% versus 102.3%. These are differently described measures, and the filing does not clearly reconcile them.
- Barter arrangements exchanged $5.3M of inventory for media credits YTD and contributed $11.1M to reported gross profit. Unused media credits were $17.6M at quarter-end, included in prepaid and other current assets. This is a notable non-cash and channel-related item.
- The company had a $105,000 YTD adjustment for other non-recurring expenses related to a legal settlement; it also recorded a $41,000 loss on disposal of property and equipment.
Outlook, risks, and controls
- No specific revenue, earnings, or margin guidance is provided in this filing. Management said cash expected from operations, credit-facility availability, and existing cash were sufficient for working capital and anticipated capital expenditures for at least the next 12 months. Management also noted that Q4 is typically the largest quarter.
- Management cited consumer spending and confidence, inflation, interest rates, housing conditions, competition, supply-chain disruption, tariffs and transportation costs, showroom execution, and technology interruptions among relevant business risks. The filing reports no material changes to previously disclosed risk factors.
- Legal proceedings are described as ordinary-course matters; management believes their resolution will not materially adversely affect financial position, operations, or cash flows. Potential severance exposure under executive agreements was $4.9M if covered executives were terminated without cause and full severance became payable.
- Management reported that it implemented remediation measures for a previously identified material weakness in IT general controls. Nevertheless, disclosure controls and procedures were concluded to be ineffective as of October 30, 2022, solely because of that material weakness.
Important facts for investors to verify
- Whether Q4 sales and profitability can offset the Q3 loss and whether spending and margin trends improve.
- Inventory levels, prepaid media credits, barter-related gross-profit contribution, and the resulting operating cash conversion.
- Drivers and persistence of distribution, tariff, freight, promotional, and showroom-cost pressures.
- Liquidity needs through the holiday season, including availability under the borrowing-base facility and lease obligations.
- Progress and effectiveness of internal-control remediation, given the ineffective-controls conclusion at quarter-end.