The Lovesac Company — Form 10-Q
Reporting period: 13 and 39 weeks ended November 1, 2020, corresponding to the fiscal third quarter and year to date. The filing was signed December 9, 2020. Lovesac designs and sells modular Sactionals, Sacs and related products through showrooms, online channels and retail partners.
Financial results and liquidity
| Metric | 13 weeks ended Nov. 1, 2020 | 13 weeks ended Nov. 3, 2019 | 39 weeks ended Nov. 1, 2020 | 39 weeks ended Nov. 3, 2019 |
|---|---|---|---|---|
| Net sales | $74.7 million | $52.1 million | $191.1 million | $141.2 million |
| Gross profit / margin | $41.3 million / 55.3% | $26.3 million / 50.4% | $99.6 million / 52.2% | $71.5 million / 50.7% |
| Operating income (loss) | $2.5 million | $(6.9) million | $(6.9) million | $(21.1) million |
| Net income (loss) | $2.5 million | $(6.7) million | $(7.0) million | $(20.6) million |
| Adjusted EBITDA | $6.0 million | $(3.7) million | $2.4 million | $(11.7) million |
Quarterly diluted earnings per share were $0.16, versus a loss of $0.46 a year earlier. Year-to-date diluted loss per share was $0.48, versus $1.45. Adjusted EBITDA is a non-GAAP measure; the company cautions that it is not a substitute for GAAP results or operating cash flow.
- Sales and channels: Quarterly sales rose 43.5%; year-to-date sales rose 35.3%. Internet sales increased 125.2% in the quarter to $25.7 million and 247.2% year to date to $101.8 million. Showroom sales rose 27.9% in the quarter, but fell 20.0% year to date amid COVID-related closures. Sactionals generated 84.7% of quarterly sales.
- Expenses and margins: Gross-margin expansion reflected fewer promotional discounts, favorable product mix and lower product costs, including tariff mitigation and sourcing shifts. Distribution and tariff costs partly offset those benefits. Quarterly SG&A increased 6.0% in dollars but declined to 34.7% of sales from 47.0%; advertising and marketing increased 51.2% to $11.0 million.
- Cash flow: Year-to-date operating cash flow was $6.9 million, compared with an outflow of $36.4 million. Investing cash outflow was $7.2 million; financing cash outflow was $0.6 million. Cash declined $0.9 million from fiscal year-end to $47.7 million.
- Balance sheet and debt: Cash was $47.7 million, inventory $57.8 million, current assets $123.5 million and current liabilities $59.5 million at November 1. Working capital was approximately $64.1 million. No borrowings were outstanding under the $25 million Wells Fargo revolving facility; borrowing availability was $19.2 million. Total liabilities were $65.9 million.
Material changes and unusual items
- COVID-19 drove temporary showroom closures and a shift toward e-commerce. All showrooms had reopened to the walk-in phase by the filing period; 348 of approximately 447 affected part-time showroom associates had been rehired by November 1. Headquarter compensation was restored for employees other than senior management as of October 1.
- Customer deposits rose to $11.7 million from $1.7 million at fiscal year-end, supporting operating cash flow. Inventory increased to $57.8 million from $36.4 million as the company prepared for seasonal demand.
- During the quarter, Lovesac launched an enhanced e-commerce platform with Adobe and Magento, including interactive 3D product configuration. The company also incurred a $0.7 million Blueport platform early-termination fee to support the transition.
- Modification of stock options generated approximately $0.4 million of additional equity compensation expense in the quarter. The 39-week results also include $2.6 million of equity-based compensation.
- Operating leases had $89.8 million of disclosed future minimum rental payments. The company expects adoption of lease accounting in fiscal 2022 to add approximately $91 million of lease liabilities, with corresponding right-of-use assets.
Outlook, risks and contingencies
Management stated that cash on hand, expected operating cash flows and available credit were expected to cover working-capital needs and anticipated capital expenditures for at least 12 months. The filing provides no specific revenue or earnings guidance. Management plans continued investment in advertising, digital capabilities, technology, showrooms and retail partnerships; it cautioned that recent growth, particularly online growth, may not persist. The business is seasonal, with most activity in the fourth fiscal quarter.
Key uncertainties include the ongoing effects of COVID-19 on consumer demand, showroom operations and third-party services; the company’s ability to sustain growth and manage expansion; competition; and distribution and tariff costs. The company reported no material change to previously disclosed risk factors. It said ordinary-course legal matters were not expected to have a material adverse effect, while noting outcomes cannot be predicted. Potential severance exposure under executive agreements was approximately $3.2 million if covered executives were terminated without cause. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether online sales growth and improved gross margins are sustainable as showroom activity normalizes and promotional or freight costs change.
- How inventory levels, customer deposits and holiday-season fulfillment affect subsequent cash flow and working capital.
- Actual borrowing availability and covenant headroom under the Wells Fargo facility; no balance was drawn at November 1.
- The timing and balance-sheet impact of lease-accounting adoption, alongside the company’s substantial lease commitments.
- The ongoing cost and performance of advertising, technology investment and the new e-commerce platform, including related-party service arrangements disclosed in the filing.