The Lovesac Company — Form 10-Q Summary
Business context and reporting period
The filing covers the 13 weeks ended May 2, 2021 (fiscal 2022 first quarter), compared with the 13 weeks ended May 3, 2020. Lovesac designs and sells modular Sactionals, Sacs and related products through showrooms, e-commerce and other retail touchpoints. The prior-year comparison was affected by temporary COVID-19 showroom closures. The company reports one operating segment.
Financial performance and liquidity
| Metric | 13 weeks ended May 2, 2021 | Comparable 2020 period |
|---|---|---|
| Net sales | $82.9 million | $54.4 million |
| Gross profit / margin | $46.1 million / 55.6% | $27.3 million / 50.2% |
| Operating income (loss) | $2.3 million | ($8.4 million) |
| Net income (loss) | $2.1 million; diluted EPS $0.13 | ($8.3 million); diluted EPS ($0.58) |
| Adjusted EBITDA (non-GAAP) | $5.3 million | ($5.7 million) |
| Operating cash flow | ($9.6 million) | ($0.5 million) |
| Investing cash flow | ($3.1 million) | ($2.3 million) |
Net sales rose 52.5%. Gross margin improved 5.4 percentage points, which management attributed to fewer promotional discounts, favorable Sactionals and premium-cover mix, lower product costs from tariff-mitigation efforts, and distribution-cost leverage. Selling, general and administrative expense increased 18.9% to $30.7 million, while advertising and marketing expense increased 30.3% to $10.7 million. Operating expenses were $43.8 million.
Cash and cash equivalents were $65.7 million at May 2, 2021, down from $78.3 million at January 31, 2021. Operating cash use reflected working-capital outflows, including inventory growth and lower accounts payable and accrued expenses. Capital expenditures and patent/trademark payments totaled $3.1 million. The company reported $18.1 million of borrowing availability under its $25 million Wells Fargo revolving facility and $41,673 outstanding, principally related to fees. Operating lease liabilities totaled $99.0 million; these are lease obligations, not revolving-credit borrowings.
Material changes and operating trends
- Showroom sales increased 170.4% to $49.0 million, largely reflecting reopened stores versus prior-year closures; the company had 116 showrooms, up from 91, and opened eight during the quarter.
- Internet sales fell 16.3% to $25.2 million as sales shifted back toward reopened showrooms. Other-channel sales increased 41.4% to $8.8 million.
- Sactionals sales increased to $74.0 million from $43.8 million and represented 89.3% of sales. Sacs sales declined to $7.1 million from $9.7 million, which management attributed to reduced promotional activity.
- The company adopted ASC 842 lease accounting in fiscal 2022, recognizing operating lease right-of-use assets and liabilities; management said adoption did not materially affect results of operations.
Outlook, risks and contingencies
No quantified revenue or earnings guidance is provided. Management said cash on hand, expected operating cash flows and credit-facility availability should fund working capital and anticipated capital expenditures for at least 12 months from issuance. It plans continued investment in showrooms, shop-in-shops, marketing, technology and infrastructure, while noting that recent growth—particularly online demand—may not continue. The business is seasonal, with most activity in the fourth quarter.
Risks highlighted include COVID-19 effects on demand, supply chains and operations; the ability to sustain growth and e-commerce sales; competition, consumer spending, showroom execution, technology interruptions and intellectual-property matters. The filing also discusses possible LIBOR replacement and potential changes to borrowing costs. Management reported no material change to previously disclosed risk factors and no legal proceedings expected to have a material adverse effect. Potential executive severance exposure was $4.5 million if all covered executives were terminated without cause and full severance became payable.
Important facts for investors to verify
- The selected financial information reports total assets of $264.6 million and total liabilities of $153.9 million, while the balance sheet reports $259.2 million and $148.5 million, respectively. The selected information also gives working capital of $75.7 million; the balance-sheet current assets less current liabilities imply approximately $76.5 million.
- The MD&A cash-flow summary appears to mislabel or reverse period headings. The primary cash-flow statement reports operating cash use of $9.6 million in 2021 and $0.5 million in 2020.
- Assess whether the strong year-over-year growth is sustainable after considering the unusually low prior-year showroom and other-channel sales caused by COVID-19 closures, alongside current cash use and planned investment.
- Review the company’s non-GAAP Adjusted EBITDA reconciliation and the distinction between credit-facility borrowings and substantial operating lease liabilities.