The Lovesac Company — Q3 FY2022 Form 10-Q
Business and period: Lovesac designs and sells modular Sactionals, Sacs and accessories through showrooms, e-commerce and partner channels. The quarter was the 13 weeks ended October 31, 2021; year-to-date (“YTD”) covers 39 weeks. Results are unaudited, and the company cautions that its seasonality—typically strongest in the fourth quarter—limits their usefulness as a full-year indicator.
Financial performance
| Metric | Quarter ended Oct. 31, 2021 | Quarter ended Nov. 1, 2020 | 39 weeks ended Oct. 31, 2021 | 39 weeks ended Nov. 1, 2020 |
|---|---|---|---|---|
| Net sales | $116.7 million | $74.7 million | $302.0 million | $191.1 million |
| Gross profit / margin | $58.6 million / 50.2% | $41.3 million / 55.3% | $163.7 million / 54.2% | $99.6 million / 52.2% |
| Operating income (loss) | $3.0 million | $2.5 million | $14.2 million | $(6.9) million |
| Net income (loss) | $2.8 million | $2.5 million | $13.3 million | $(7.0) million |
| Diluted EPS | $0.17 | $0.16 | $0.83 | $(0.48) |
- Quarterly sales rose 56.1%; YTD sales rose 58.1%. Sactionals represented 86.0% of quarterly sales and 87.3% YTD.
- Quarterly gross margin declined 510 basis points, primarily from higher freight, distribution and tariff costs; better product margin from reduced discounting partly offset the pressure. YTD margin improved 200 basis points as lower discounting and vendor negotiations more than offset higher distribution and tariff costs.
- Quarterly operating expenses were $55.6 million, including $38.1 million in selling, general and administrative costs and $15.8 million in advertising and marketing. YTD operating expenses were $149.5 million.
- Adjusted EBITDA, a non-GAAP measure, was $5.8 million for the quarter and $23.6 million YTD, versus $6.0 million and $2.4 million, respectively, in the comparable periods.
Liquidity, cash flow and obligations
- At October 31, cash was $47.9 million, working capital $82.0 million, and total liabilities $172.2 million. The balance sheet included $106.4 million of operating lease liabilities; these are lease obligations, not reported line-of-credit borrowings.
- YTD operating cash flow was negative $15.2 million, compared with positive $6.9 million in the prior-year period. Inventory increased $44.1 million and receivables increased $5.3 million; cash was also affected by $10.4 million of operating lease liability payments.
- YTD investing cash outflow was $11.8 million, mainly for showroom and other capital investment. Financing cash outflow was $3.5 million, primarily taxes paid for net share settlement of equity awards. Cash declined $30.5 million from the start of the fiscal year.
- No borrowings were outstanding on the $25 million Wells Fargo revolving facility; borrowing availability was $22.5 million at quarter-end. The facility matures in February 2023 and is subject to borrowing-base limits and covenants.
Changes, outlook and risks
- Showroom sales grew as locations reopened and expanded: YTD showroom revenue was $181.3 million versus $72.5 million. Internet revenue fell 11.4% YTD to $90.2 million as some demand shifted back to stores; quarterly internet sales nevertheless increased 38.2% year over year. Lovesac reported 135 showrooms, versus 107 a year earlier.
- Management said existing cash, expected operating cash flows and available credit should cover working capital and anticipated capital expenditures for at least the next 12 months. No specific revenue or earnings guidance was provided.
- Management cited continuing uncertainty from COVID-19 and related supply-chain disruption. Higher inbound transportation costs and tariffs pressured margins; the company also flagged competition, consumer spending, growth execution, showroom expansion and technology interruptions as risks. LIBOR transition could affect future borrowing costs.
- The company adopted ASC 842 lease accounting in fiscal 2022, recognizing lease assets and liabilities. YTD included a $0.6 million showroom right-of-use asset impairment. The company reported no material change to previously disclosed risk factors and no legal proceedings expected to materially affect its financial position, results or cash flows.
- The company said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Facts investors should verify
- Whether inventory growth and the negative YTD operating cash flow convert to sales and cash generation, particularly through the holiday quarter.
- Whether elevated freight and tariff costs persist, and whether pricing, sourcing, vendor negotiations and distribution efficiencies can protect gross margin.
- Whether showroom expansion and customer demand sustain growth as channel mix normalizes; assess the unusually weak prior-year showroom comparison.
- Available revolver capacity, borrowing-base terms and covenants, alongside the company’s cash needs and lease commitments.
- How management’s 12-month liquidity assessment holds up against seasonal working-capital needs, capital spending and supply-chain disruption.