The Lovesac Company — FY2019 Form 10-K
Reporting period: Fiscal year ended February 3, 2019 (52 weeks), compared with the year ended February 4, 2018 (53 weeks). The filing is an annual report, not a standalone quarterly filing; its fiscal fourth quarter ended February 3, 2019.
Business context
Lovesac designs and sells modular Sactionals couches, foam-filled Sacs and accessories through showrooms, ecommerce and shop-in-shops, including Costco roadshows. At year-end it operated 75 showrooms. Sactionals accounted for about 72% of FY2019 revenue and Sacs about 25%. The company completed its IPO in June 2018, raising approximately $58.9 million net.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $165.9 million | $101.8 million |
| Gross profit / margin | $90.9 million / 54.8% | $57.2 million / 56.2% |
| Operating loss | $7.0 million | $5.0 million |
| Net loss | $6.7 million | $5.5 million |
| Adjusted EBITDA | $3.4 million | $1.3 million |
| Cash used in operating activities | $7.0 million | $2.7 million |
| Cash used in investing activities | $11.4 million | $6.8 million |
Revenue increased 62.9%. Showroom sales rose 45.3%, internet sales 75.2% and other sales, including shop-in-shops, 286.2%. Gross margin fell 1.4 percentage points, primarily from product and channel mix and higher freight costs, partly offset by sourcing savings and vendor rebates. SG&A increased 50.3% in dollars but declined as a share of sales, from 49.9% to 46.1%; advertising and marketing rose to $18.4 million, or 11.1% of sales.
Fiscal fourth-quarter revenue was $64.2 million and net income was $8.4 million. The business is seasonal: FY2019 Q4 generated 38.7% of annual sales. The prior-year fourth quarter had 14 weeks, versus 13 weeks in FY2019.
Balance sheet, cash flow and financing
At February 3, 2019, audited cash and cash equivalents were $49.1 million, working capital was $60.5 million, total assets were $105.0 million and total liabilities were $26.2 million. Inventory increased to $26.2 million from $11.6 million, contributing to operating cash use. The company reported $31,373 outstanding on its Wells Fargo asset-based revolving facility; borrowing availability was reported inconsistently as $11.1 million and $11.5 million in different sections. The facility permits borrowings up to $25 million, subject to borrowing-base limits.
Financing cash flow included approximately $58.9 million of net IPO proceeds. A secondary offering of 2.22 million shares by existing holders generated no proceeds for Lovesac. Preferred stock converted into common stock at the IPO, with preferred dividends and deemed dividends materially increasing the loss attributable to common stockholders to $34.5 million and reported loss per share to $3.28; GAAP net loss was $6.7 million. Operating lease commitments totaled $61.1 million, including $9.4 million due within one year.
Outlook, risks and unusual items
- Management forecast FY2020 net sales growth of 40%–45%, 15–20 new showrooms, eight showroom remodels and approximately 690 shop-in-shop events.
- Management expected FY2020 gross margin to decline about 3 percentage points from FY2019, citing product and margin mix, tariffs and distribution investment. It expected the greatest pressure in Q1 and said tariff mitigation was underway.
- Planned FY2020 capital expenditures were approximately $13 million, including showroom expansion and remodeling, a $3 million investment in a company-operated Sac manufacturing facility, and technology and logistics systems.
- Management expected Adjusted EBITDA to improve for FY2020 overall, while projecting declines of $2–$3 million in each of Q1 and Q2, flat performance in Q3 and significant improvement in Q4. The company remained loss-making on a GAAP basis.
- Principal risks include reliance on a limited supplier base, including a single Texas Sac manufacturer; China and Vietnam sourcing and tariff exposure; customer demand and competition; marketing acquisition costs; execution of showroom and ecommerce growth; substantial lease obligations; and technology, cybersecurity and inventory-management risks.
- The company disclosed an IRS matter concerning approximately $10.8 million of uncertain tax positions related to net operating losses; it maintained a full valuation allowance and stated resolution would not affect its financial position or results. No legal proceedings were identified as reasonably likely to have a material adverse effect.
- After year-end, 279,325 executive restricted stock units vested under an accelerated vesting trigger, resulting in approximately $3.5 million of additional compensation expense.
Key facts for investors to verify
- Reconcile the filing’s cash figures: audited statements report $49.071 million, while a selected-data table reports $49.271 million.
- Confirm actual revolving-credit availability; the filing states both $11.1 million and $11.5 million.
- Assess whether forecast growth, showroom openings and tariff mitigation translated into results, particularly given the expected FY2020 margin pressure and quarterly Adjusted EBITDA declines.
- Review the sustainability of growth against rising customer acquisition cost ($309.46 versus $283.22) and the company’s reliance on continued marketing investment.
- Evaluate potential dilution from outstanding warrants and equity awards, and the impact of the preferred-stock conversion and IPO-related deemed dividends on reported per-share results.