The Lovesac Company — Q2 FY2022 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended August 1, 2021, compared with periods ended August 2, 2020. The company designs and sells modular Sactionals, Sacs and related home accessories through showrooms, ecommerce and partner touchpoints. Results are seasonal, with most activity typically in the fourth fiscal quarter.
Financial performance and liquidity
| Metric | Q2 FY2022 | Q2 FY2021 | First half FY2022 | First half FY2021 |
|---|---|---|---|---|
| Net sales | $102.4 million | $61.9 million | $185.4 million | $116.3 million |
| Gross profit / margin | $59.0 million / 57.6% | $31.1 million / 50.1% | $105.1 million / 56.7% | $58.3 million / 50.2% |
| Operating income (loss) | $9.0 million | $(1.0) million | $11.3 million | $(9.4) million |
| Net income (loss) | $8.4 million | $(1.1) million | $10.5 million | $(9.5) million |
| Diluted EPS | $0.52 | $(0.08) | $0.66 | $(0.65) |
| Adjusted EBITDA (non-GAAP) | $12.4 million | $2.2 million | $17.7 million | $(3.5) million |
- Growth and margins: Sales rose 65.4% in Q2 and 59.4% in the first half. Gross margin improved 749 basis points in Q2 and 655 basis points for the first half, primarily from lower promotional discounting, vendor negotiations and sourcing shifts, partly offset by higher inbound freight costs.
- Channel mix: First-half showroom sales increased to $111.6 million from $31.0 million, while internet sales fell to $54.7 million from $76.1 million as customers returned to reopened showrooms. Other-channel sales increased to $19.1 million from $9.2 million. The company had 123 showrooms, versus 97 a year earlier.
- Cash flow: First-half operating cash flow was $0.8 million, down from $12.1 million, despite $10.5 million of net income. Inventory growth used $24.6 million of cash. Investing cash outflow was $7.4 million, primarily capital expenditure; financing cash outflow was $3.3 million, mainly taxes paid on net share settlement. Cash decreased $9.9 million from fiscal year-end to $68.5 million.
- Liquidity and obligations: Working capital was $80.8 million. The $25 million Wells Fargo revolving facility had $22.5 million of borrowing availability and only $115 outstanding, principally related to fees. Operating lease liabilities totaled $98.2 million; these are lease obligations, not reported borrowings. Total liabilities were $164.3 million.
Changes, outlook and risks
- Compared with the pandemic-affected prior-year period, showroom and partner-channel sales rebounded as locations reopened; internet sales declined. Management attributed much of the comparison to prior-year showroom restrictions and a shift in customer purchasing back to stores.
- Operating expenses increased with hiring, variable compensation, showroom rent, marketing and growth-related infrastructure. Management expects continued investment in showrooms, marketing and infrastructure, and anticipates certain expenses will rise as the business expands.
- No specific financial guidance was provided. Management stated that cash, expected operating cash flows and available credit were expected to cover working-capital needs and planned capital expenditure for at least the next twelve months.
- Risks cited include COVID-19 and related business disruption, supply-chain uncertainty, escalating container freight costs, tariffs, consumer spending, competition, execution of growth plans and the ability to sustain growth. Management also discussed the expected transition away from LIBOR; a hypothetical 100-basis-point LIBOR change was not expected to materially affect results.
- FY2022 adoption of lease accounting recognized right-of-use assets and lease liabilities; management reported no material effect on operating results. The company recorded a $0.6 million showroom right-of-use asset impairment. A stock-option market condition was met in June 2021, accelerating recognition of approximately $0.2 million in Q2 compensation expense.
- Potential severance exposure under executive agreements was $4.7 million if covered executives were terminated without cause. The company said ordinary-course legal matters were not expected to have a material adverse effect and reported no material off-balance-sheet arrangements other than employment agreements.
Investor verification points
- Assess whether sales growth and improved margins persist after accounting for pandemic-related showroom comparisons, promotional activity, and product/channel mix.
- Monitor inventory growth, freight and tariff costs, and whether operating cash generation improves as the company expands.
- Verify showroom openings, sales productivity and the economics of shifting sales between showrooms, internet and partner channels.
- Track liquidity against capital spending and seasonal working-capital needs; distinguish operating lease liabilities from funded debt.
- Review management’s stated growth and liquidity expectations alongside COVID-19, supply-chain, consumer-demand and LIBOR-transition risks.